The past month was characterized by consolidation for copper. The industrial metal fluctuated in a relatively narrow range between $3.70/lb and $4.
While the global economic backdrop is supportive now that the worst-case eurozone sovereign debt scenarios have been taken off the table, China, which accounts for close to 40 percent of total copper consumption, is seeing its growth decelerate.
This was underscored earlier this week when the government announced it would be targeting 7.5 percent growth this year, an eight-year low as it tries to rebalance the economy away from export dependence and toward more domestic consumption.
However, "[i]n recent years, the GDP target has obviously always been a minimum acceptable floor rather than a ceiling, so I think it is more likely that in the government's heart of hearts, it is leaning on growth of a bit above 8 percent," said Paul Cavey, an economist with Macquarie Bank.
Nevertheless, slowing consumption in China is a concern, and traders will watch the data closely to see the implications for copper demand. On that front, the evidence is mixed.
China’s copper imports hit a record of more than 500,000 tonnes in December, before backing down modestly in January.
CHINA COPPER IMPORTS
On the other hand, inventories in warehouses monitored by the Shanghai Futures Exchange surged since the beginning of the year to a 10-year high of 221,000 tonnes.
SHANGHAI COPPER STOCKS
Further complicating the picture are stocks of copper at warehouses monitored by the London Metal Exchange. Inventories there have been falling consistently since late last year.
LME COPPER STOCKS
It almost looks like inventories have been transferred from London to Shanghai. The latter has seen a 194,000 tonne drop in stocks since the beginning of October, while the latter has seen a 163,000 increase since December.
In other words, inventories paint a fairly balanced picture of supply and demand.
Potential upside catalysts include strong economic data out of the United Sates or China, and particularly, interest rate or reserve requirement ratio cuts in China, which could drive prices notably higher.
The flip side is that weak economic data will likely pressure copper prices. As monetary tightening in China is unlikely amid slowing inflation, that is not a significant downside risk factor.