Copper prices slumped to the lowest level in five and a half years yesterday (Wednesday), the metal suffering its biggest one day decline for over three years. Three-month copper on the London Metal Exchange fell as much as 6.6% to $5,323 per tonne at one point before settling at $5,552 per tonne.
Analysts have pinned the blame on the actions of Chinese funds aggressively selling copper. A downgrade to global growth for 2015 to 3% and warnings of a hard landing in China providing fuel for the fire.
Although the red metal comes with the nick name Dr Copper, a reference to its perceived status as a bellwether of economic activity the metal has become increasingly driven by demand for its use as collateral in recent years. This means that significant volatility can occur without an apparent strong fundamental reason for the price move.
Indeed, demand from China remains strong for the time being. According to figures from Chinese customs authorities, China imported 420,000 tonnes of copper in December, lifting the 2014 total to a record 4.83 million tonnes, beating the previous record of 4.65 million tonnes in 2012.
At this time of year though physical traders prefer to hold as little inventory as possible this time of year as manufacturing activity usually slows over the forthcoming Chinese Spring holiday (which starts 19th February). Taken together with the negative sentiment that is affecting other commodities the sharp drop is likely to have been an over reaction.
Although there is potential for further weakness in coming weeks the sharp drop in the copper price could be an opportunity for China’s State Reserve Bureau (SRB) to take on more copper reserves providing a floor to prices. More broadly though the sharp drop in the Oil price has raised questions about what the longer term cost floor for copper prices is. The drop in the oil price will have reduced costs for copper miners and refiners.