Copper price: China fears overdone

The copper price is having a torrid 2015 as the economic news out of number one consumer China continues to rattle investors.

On Tuesday in New York trade September copper failed to bounce from six-year lows struck yesterday, exchanging hands for $2.3475 a pound ($5,175 a tonne) after dipping to $2.33 earlier.

Copper's latest drop follows a reading of Chinese manufacturing activity that shocked the market. The copper price is down 17% so far this year.

The Caixin manufacturing purchasing managers' index (PMI) for July fell by more than expected to a two year low of 47.8.

A reading below 50 indicates a contraction and the Caixin index has shown shrinking output, orders and prices for five straight months.

The official government-compiled manufacturing PMI, published on Saturday, was much healthier than Caixin, but also edged down from 50.2 to 50.0.

China, the world's second largest economy, is responsible for 45% of total global copper demand of some 22 million tonnes and the country's PMI data is particularly closely correlated to the copper price as the graph shows.

Capital Economics in a research note argues that the recent drop in commodities in general and particularly copper should prove short-lived:

"The weak readings partly reflect temporary disruptions to factory activity as a result of a number of tropical storms that hit China’s key manufacturing hubs over the past month. In addition, recent stock market volatility probably hurt business sentiment and led firms to provide more downbeat responses to the latest PMI surveys, we think it will have a limited impact on real economic activity and still expect growth to have picked up last month.

"What’s more, there are already signs that the policy support implemented in recent months has begun to boost economic activity. And the authorities still have plenty more ammunition at their disposal to prevent conditions from worsening any further."

The independent research house expects the copper price to recover in the second half of this year and into 2016-17. By the end of the year Capital Economics see copper above $2.80 a pound ($6,250 a tonne) rising to $3.17 a pound ($7,000 a tonne) by the end of 2016.

Source: Capital Economics, Markit, Thomson Datatstream