Copper Prices Could Struggle to Improve Because of These Headwinds

Copper is having a forgettable year. The trade war between the U.S. and China has taken a toll on the metal and led to a sharp decline in copper prices over the past six months. More specifically, the spot price of copper has dropped from $2.90 per pound towards the end of March to $2.60 per pound at present.

However, there is a chance that this 10% decline might accelerate in the coming months until and unless there is a resolution to the U.S.-China trade war. Let me explain why.

China Is Not Consuming Enough Copper

Weak data out of China indicates that an economic slowdown is knocking the wind out of the country’s manufacturing activity.

The National Bureau of Statistics revealed that China’s factory output for the month of August had increased by 4.4%. This was below what analysts were expecting, and alarmingly, the lowest reading seen since February 2002. The data sent copper prices lower as China is a key consumer of the metal.

In fact, weak economic activity in China clearly reflects on the price of copper. Reuters reports that imports of unwrought copper into China fell 3.8% to 404,000 tonnes from 420,000 tonnes in the preceding month and the prior-year period. Partially processed copper ore imports also fell 12.5% month over month to 1.815 million tonnes.

Given that China’s factory activity has shrunk for four quarters on the trot, weak copper demand from the country does not come across as a surprise. This is bad news for copper prices as China is the world’s largest importer of the metal, accounting for 43% of global imports.

So it is not surprising to see why analysts have been cutting copper price estimates of late. As reported by Financial Post:

“Regarding copper, a drop in Chinese demand has loosened the global market, while sentiment continues to worsen,” Fitch Solutions said in a note.

The research house has cut its average price forecast for copper to $5,900 a tonne this year and $5,700 in 2020, from previous views of $6,300 a tonne and $6,600 a tonne respectively.”

What Should Investors Do?

Copper prices could continue to remain under pressure as tensions between the U.S. and China could intensify.

Beginning Dec. 15, China will impose an additional 5% tariff on imports of copper scrap from the U.S. This comes after the imposition of 25% tariffs on copper scrap that was put into effect earlier. The original tariffs had led to an 80% decline in copper scrap imports by China from the U.S.

So there’s a good chance that copper demand in China could weaken further and create a negative demand-supply dynamic that will create downward pressure on pricing. As such, don’t be surprised to see copper prices heading lower in the coming months.

One way investors can expect a turnaround in the price of the commodity is when the U.S. and China decide to call an end to the trade war. But that doesn’t look likely at present, which is why it would be a good idea for investors to stay cautious while investing in stocks of companies that are dependent on copper prices.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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