Hedge funds turn bullish on copper as China’s economy shows strength

New data showing renewed strength in various components of the Chinese economy has caused hedge funds and other market analysts to turn bullish on copper. The technical outlook for this key industrial metal also looks favorable.

Having slowed for seven consecutive quarters, data released yesterday showed that China’s economy grew by 7.4% in the third quarter of this year. The latest figures from Beijing showed that industrial production, retail sales and fixed-asset investment had all picked up in September, supporting the view that China may have successfully engineered a so-called “soft landing”.

According to data from the US Commodity Futures Trading Commission (CFTC), hedge funds have increased their bullish bets on copper to their highest in almost 14 months. Meanwhile the proportion of bulls amongst the seventeen analysts surveyed by Bloomberg was the highest since October 2011.

Data from the US showing that new-home construction in the country rose to a four-year high in September also supports a bullish outlook for the price of copper.

China consumes about 40% of the world’s copper while North America accounts for a further 11%.

Discussions at the annual gathering of the metals industry, LME Week, which is currently taking place in London, have been dominated by uncertainties in the world’s three most important economies. These are the handover of power in China, the US election and looming fiscal cliff, and the debt crisis in the Eurozone.

In a video interview with the Financial Times, Andrew Michelmore, chief executive of MMG, the international mining arm of Minmetals of China, said “everyone is sitting on the sidelines waiting for the US election and the appointment of the new Chinese leadership”. However despite the uncertainty in key economic regions, many company executives and metals analysts see the supply and demand situation for copper remaining tight.

In a separate interview with the FT, Thomas Keller, chief executive of Codelco, the world’s largest copper miner, said, “in general I would say that the fundamentals are still strong and we are not looking at a situation where the current price level is in jeopardy”.

Addressing the supply side of the equation, Mark Hansen, head of metals at Noble Group, said, “There’s no question that copper supply is on the way up”, an opinion shared by Diego Hernández, chief executive of Antofagasta.

At last week’s Cambridge House conference in Toronto, Adrian Day, president of Adrian Asset Management in London, told a group of investors that by the middle of the next decade there won’t be enough copper to meet demand from China.

Copper consumption in China more than quadrupled in the 15 years to 2010, and Mr Day said that it’s, “unlikely there will be a major producer in 2020-25 that we don’t already know about, and not enough to meet anticipated demand, if China’s growth continues, even at the 7.5% to 8.5% range”.

He also warned that, “there has been a significant decline in production from the largest copper mines and we’re not finding enough to replace it… From discovery to lead time can be a long time — as much as 20 to 30 years.”

The copper price, which is widely seen as a bellwether for the health of the global economy, reached an all-time high in February 2011 at $4.649 per pound. By October 2011, however, the price had fallen by 35% to $2.994. Today copper on the Chicago Mercantile Exchange (CME) trades at $3.73 per pound.

Technical outlook

As the chart below shows, copper may be forming a bull flag pattern (blue lines). In technical analysis the bull flag pattern is considered to be a short-term continuation pattern that marks a small consolidation before the previous move resumes. The pattern gets its name from its resemblance of a flag on a pole and it is usually preceded by a sharp advance or decline with heavy volume.

A 6 month chart of copper (daily)

A 6 month chart of copper (daily)

Chart courtesy of stockcharts.com

Those looking to buy a breakout from the bull flag, should go long when the upper resistance line is broken decisively. As always a spike in volume would confirm the move.

The short-term chart also shows that the 50-day moving average is about to cross above the 200-day moving average (circled). Again, this is potentially bullish from a technical perspective.

From a longer-term perspective, as the weekly chart below shows, copper has recently broken out of a long consolidation period which began back in 2011. The upper blue line which acted as overhead resistance for more than a year, should now provide support.

A 4 year chart of copper (weekly)

A 4 year chart of copper (weekly)

Chart courtesy of stockcharts.com

The bottom line

There can be little doubt that the world’s major economies face some serious headwinds, however both short-term technical factors, and long-term fundamentals (supply/ demand) suggest that copper could be heading higher.

Not only is copper a vital raw material, it is also a hard asset. It is therefore likely to benefit from all the currency debasement that is now under way.

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