Chinese trade figures and trends in copper

Chinese trade data

China’s trade numbers are in for August and while traders on balance seem to be disappointed, we continue to see the glass half full. Most of the criticism has been around weak import numbers but our focus is on the export side of the equation. Exports grew at 2.7% while imports dipped 2.6% compared to the same period last year. The net result, a trade surplus to the tune of US$26.7bn compared with forecasts of US$19.8bn. so while composition was like the market had expected, China is still showing its export industry is growing despite global economic issues.

 Keep an eye on Doctor Copper

The term doctor copper is one we have used previously in our writing – it basically acknowledges the base metal as an important lead indicator on the overall health of the global economy. It has a reputation of having a “Ph.D. in economics” because of its ability to predict turning points in markets. With our focus on Asia, copper is a very important lead indicator in testing the health of the Chinese economy. That’s the demand side; we also keep a close eye on stockpiles as reported by the London Metals Exchange when judging supply movements. These stockpiles remain towards the very bottom of the 5 year historical average, near 200,000 tonnes. They have been as low as around 110,000 tonnes in February 2008 and as high as 550,000 tonnes in the same month of 2010.

On Friday City Index wrote “The price of copper is comfortably above the all-important US$3.30/lb technical support level, which was tested in the past few weeks and held very strongly. The next leg up could see US$3.60-65/lb tested.” This test has come sooner than expected with the spot price trading at around US$3.66/lb in early morning Asian trading on Monday – the time of writing. A convincing break above US$3.65/lb could see the test of US$/lb and beyond over the next few months. This will flow through to the earnings of major copper producers; some like Oz Minerals listed in Australia averaging production costs of around US$1.20/lb – there is a very large margin and obvious leverage to pricing.

For China, the copper price action is signaling policy response. Traders are starting to take positions in anticipation of a coordinated response, even though it may not carry the same form as 2009. There is now widespread acknowledgement that China is on the cusp of a concrete policy plan with large scale projects being announced over the past few weeks. These include the approval of 13 highway projects and other municipal port projects on Thursday according to the National Development and Reform Commission. This followed on from 25 new rail projects announced on Wednesday. Combined, last week’s announcements represent up to 2% of the total size of the Chinese economy in additional stimulus.

There are doubts around the size of these projects and timing – but the copper market for now is the best indicator.