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Copper used to be considered one of the relatively bright spots in the recent downturn of commodity prices. But now it is becoming yet another victim of China’s slowing economy, and the future looks bleak.
“There was always this belief that the deceleration in the Chinese manufacturing sector was going to not just stabilize, but there was this hope that we would see a modest reacceleration,” said John Mothersole, a research director with consultancy IHS, who specializes in metal price analysis and forecasting. “Markets are coming to realize that those expectations were falsely held,” he said.
Copper, like other commodities, has been on a decline since 2011. This year, the red metal is down 20 per cent.
The metal, used in power generation, cars and construction, has dropped as low as $2.20 (U.S.) a pound – the break-even price for some producers.
The main problem is the surplus of copper in the market along with excess capacity in the Chinese copper industry.
Another problem is the amount of copper that has been used as collateral in financing deals. Analysts speculate that at least half the copper in China’s warehouses is being used as collateral. If those deals are unwound, it would flood the market with copper and further drive down prices.
On top of all this, China’s heavy-handed response to the rout in its stock market fuelled fears that the Asian government was mismanaging its economy.
Last week, China cut interest rates for the fifth time in less than a year. This followed a surprise devaluation of its currency earlier in August. Those moves have roiled markets and led investors to believe that China’s economic slowdown was worse than previously thought.
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