Copper outlook: After some weakness, expect a turnaround

Faith in metal-backed lending in China is corroding - and so is confidence in the country's giant credit system. Authorities are investigating whether traders at Qingdao port used the same lot of copper and aluminium to back multiple loans. China can just about manage without foreign lenders, but it can't do without collateral and confidence. These underpin the explosion in non-bank lending, including trusts and investment products sold to individuals, which has now reached huge proportions.

The size of unreported copper stockpiles in China has been a source of mystery and confusion for years, particularly as the country's booming credit market has created pent-up demand for metal imports as collateral against loans. That has bolstered prices and tightened supply. London Metal Exchange (LME) stocks are below 170,000 tonnes for the first time since 2008 and cash prices were as much as $100 higher than forward prices last month. So far, there is no sign of the metal's showing up. LME stocks have fallen by 2,000 tonnes since the Qingdao crackdown was reported on June 2. Nervous traders are watching the daily data closely. However, large and well-established importers have been seen to survive previous crackdowns and it is largely expected that there will not be any major repercussions.

On the positive side, China's central bank said on Wednesday it will keep monetary policy steady in 2014, even as the finance ministry said fiscal spending had surged nearly 25 per cent in May from a year earlier, highlighting government efforts to energise the slowing economy.

China's cabinet also revealed on Wednesday that it was now planning more big infrastructure projects, including highways, train networks and oil and gas distribution and storage facilities, as part of its efforts to keep the economy growing at a stable rate. This means higher demand for the metal. The higher spending comes after the world's second-biggest economy got off to a soft start this year, growing at its slowest pace in 18 months in the first quarter. The economy has since shown some signs of stabilising, but the recovery appears patchy and markets do not rule out further stimulus measures, especially if the cooling property market starts to deteriorate rapidly.

The present situation could sentimentally affect copper for some time till the market gets tired of the crackdown and starts focusing on depleting LME inventories and potential demand from China and a recovering US economy.

Technically, weakness should continue and LME copper could drift lower towards $6,000-$6,100 from where a possible turnaround can be seen. In MCX copper, prices could edge lower to Rs 380-85 levels for where a potential bottom can be seen in the coming weeks.

The author is director, Commtrendz Research