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An Omen?

On the numbers, a difficult December closed out a difficult 2018.

Whether you look at nonferrous metals; precious metals (Ex Pd); energy; or equities, 2018 was a bummer, with many markets down in double digit percentage points. And if the figures themselves weren’t enough to make us cringe, recent news reports should make us shutter, as the New Year gets underway.

Apple announced slowing sales of the I phone in China, sending its share price, and the overall market sharply lower; China’s PMI index fell below 50 for the first time since May 2017; a recent Bloomberg headline announces “A Fifth of China’s Homes Are Empty – That’s 50 million Apartments”.

CNBC reports that auto sales in China declined again, and we would have to go back to the Asian Financial crisis of 1998 – 1999 to see the last time China experienced this level of weakness.

And, of course, every report has to include the ongoing trade war as a key factor, and trigger point of the downturn. But this is critically important, particularly now, because China has become the ‘Big Guy’ in the room as it represents fully 50% of global consumption of industrial materials.

There is no question that new trade tariff barriers are contributing to weakness, but there are several more issues that are helping to stir trouble in the pot.

On the European side, Brexit is, and has been a big thorn in the side of the Continent, that is getting more painful by the day; France is experiencing riots from overarching government policies; Germany is facing economic weakness, for the first time in a long time; Italy is looking like Greece a few years ago, and the EU has been preoccupied with keeping itself together.

Within the United States, despite an exceptionally strong unemployment report for December, we also saw a sharp decline in the ISM Index – within both manufacturing and non-manufacturing; housing starts and building permits have been edging lower, as have new home sales, as well as existing home sales. And now, because of the government shutdown, updated statistics are not coming out.

As relates to copper specifically, it is worth taking a look at the market from an entirely different vantage point. That is to say, while we continue studying the fundamentals of the market as we have for many, many years, it is the technical approach that has evolved to be our guiding light.

Taking this a step further, earlier this year, an analysis of the fundamentals would have advised us to be long copper as inventories were falling, reflecting the global market in deficit. Indeed, the International Copper Study Group reports that refined copper was in a 369,000 metric tonne deficit during the first nine months of 2018.

But apparently, the market didn’t get that message, as January 2018 saw the monthly average price at $3.19, which, as we look back, was the high-water mark for the entire year.

Taking the technical approach a step further, and recognizing that this can only be said with the benefit of hindsight, perhaps 2018 was just a correction of a more important move in the market.

Stay with me on this as it is getting a bit more involved than we had intended.

Take a look at the copper chart. The record high monthly average occurred in February 2011 at $4.49. From that peak, the price fell to a low of $2.01 in January 2016. Thus, over about 5 years, the price fell $2.48, or 55%.

From that low point, copper advanced $1.18 or nearly 60% to the $3.19 high set in January.

Thus, one could say that the $1.18 advance, was an almost 50% correction of the $2.48 decline.

So, IF the move from January 2016 to January 2018 was just a technical correction of the January 2011 – January 2016 decline, we may see a further retracement back to lower levels. This would not be very different from what occurred in the 1996 – 1997 period, following the unfortunate massive trading debacle.

Nevertheless, there is no point in trying to guess how low the market may go, or when it may reach bottom, so we won’t even try.

What we will say though, is to the extent copper does continue moving lower, it is in the process of digging a deeper and stronger foundation, for its next move to a much higher lever.

John E Gross