China's Manufacturing Slowdown Hampers Copper

By Shihoko Goto — Exclusive to Copper Investing News 

China's Manufacturing Slowdown Hampers Copper

A slowdown in China's manufacturing sector for the fifth consecutive month is pushing copper prices lower, and worries are growing that the appetite of the world's largest red metal consumer will fall further. Still, an uptick in demand from the United States and other countries is expected to keep copper demand steady moving forward.

The HSBC Flash Purchasing Managers' Index for China reached 48.1 in March compared to 49.6 the previous month, the investment bank reported. A reading below 50 indicates a contraction, and the decrease was largely a result of a slowdown in exports coupled with weaker domestic demand, analysts said.

In late afternoon trade Thursday, COMEX copper for May delivery is 2.1 percent lower at $3.76 a pound.

Comments from mining giant BHP Billiton (ASX: BHP), which expressed concerns about the Chinese market, have also hurt industrial metals demand across the board. Earlier this week, Ian Ashby, BHP's iron ore division president, told reporters in Perth that demand for the metal would fall “to single digits, if it is not already there.”

Yet multiple signs of steady US economic recovery should continue to prop up global demand for the red metal. The US remains the second-largest consumer of copper, and last month housing permits rose to their highest level since October 2008, indicating a steady climb in the housing market in the near future.

Investors have also been comforted by comments made by David Joyce,  Rio Tinto's (LSE: RIO) managing director of expansion projects, at a Perth mining conference. He stated that "although the rate of GDP growth in China is more immediately slowing, we remain confident on the basis of the figures we have seen of a soft landing, with solid growth for this year.”

Some economists expect China to ease monetary policy soon in an effort to prop up growth, with Goldman Sachs stating in a research note that the possibility of a rate cut “significantly increased recently.”

Company news

Ivanhoe Mines (NYSE: IVN) stated earlier in the week that its Oyu Tolgoi copper and gold project is on track to begin initial production later this year, but there is speculation in some corners that the deadline may not be met. Australia's Brisbane Times, for instance, reported that there are difficulties in delivering the necessary power to the location, as a deal to import power from China has still not been reached. The plan is to connect the site to a power grid on the Chinese side of the border, but officials from China and Mongolia have not yet agreed to the specific terms.

Reduced copper inventories among consumers and lopsided global stockpiles are leading to higher European premiums for the red metal, said  Aurubis (FWB: NDA) CEO Peter Willbrandt in an interview with Bloomberg.

“It's not really a pickup in the economy causing the rise in premiums…[t]he supply pipeline here in Europe is really empty. Any delay to shipments into Europe further tightens the market,” Willbrandt told Bloomberg.