China Sends Copper Price Lower

Wednesday, May 4, 2016

Copper is having a rough time in the market as of late, and for good reason. Unfortunately, the economic conditions in China are dragging the value of the metal downward. Today, we'll talk about recent data out of China, why it matters, and what we can expect to see from copper moving forward. So, let's get right to it.

China's Economy Is Not Doing Well

Unfortunately, China is struggling in a big way economically, and that can mean big problems for copper and copper investors. Recently, there have been two big stories out of China that show that the country's economy has had better days:

  • PMI – The PMI or purchasing managers index, is a very important economic signal when gauging just about any economy. In the case of the Chinese economy, this is no different. The reality is that when purchasing managers aren't expecting to see much by way of positive economic movement, it usually becomes a self-fulfilling prophecy. With that said, China's PMI was recently released, with the number coming in at 49.4. When the PMI comes in below 50, it's a signal of a contracting economy, which is never a good sign.
  • Yuan Devaluation – On top of the fact that the Chinese PMI is incredibly low, the nation recently shocked the financial markets by devaluing the yuan further. To do so, the People's Bank of China made the decision to lower the yuan's fixed daily reference rate against the United States Dollar by 0.58%. As a result, the fixed daily reference rate is now sitting at 6.4943%. It is the hope of the People's Bank of China that this will reduce the price of Chinese products further, increasing demand for Chinese national products around the world and improving exports.

Why Does The Chinese Economy Have Anything To Do With Copper?

While it may seem like the Chinese economy and the price of copper are two different stories entirely, you'd be surprised at just how correlated they are. The reality is that China is the world's second-largest economy. On top of that, the country is the world's largest consumer of raw materials, including copper. As a result, when the Chinese economy isn't doing well, the demand for raw materials, like copper, decline. Based on the law of supply and demand, declines in demand mean declines in price.

What We Can Expect To See From Copper Moving Forward

While I would like to say that I have a bullish opinion of what we can expect to see from copper moving forward, that simply isn't the case. The reality is that China's economic conditions are incredibly concerning. With China being the world's largest consumer of copper, poor economic conditions spell signs of trouble for the commodity.

However, China isn't the only reason my opinion on copper is bearish. The reality is that the global economy is at a concerning point at the moment. While this is good for safe haven investments like gold and silver, metals like copper don't tend to do well when economic conditions are poor. With consumers spending less money, we tend to see declines in demand for copper overall. As a result, I'm expecting to see long-term declines in the price of the metal. 

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.