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Another -15% in Copper?

Today's 4.3% slump in copper is the ninth consecutive daily decline in the metal, a pattern last seen 11 months ago during the peak of China's financing shenanigans -- when Chinese companies used the metal as collateral to access cheap-USD financing and invest the proceeds in higher yielding Chinese yuan.

Since the start of 2014, copper is down 20, outperforming energy commodities (Brent -56%, WTI -49%, NatGas -29%) and underperforming metals (gold +2.0%, silver -14%). The striking difference between now and Q1 2104 is that copper is now joined by the much feared converging decline along the rest of metals, energy and agricultural commodities. The extent of copper's damage is highlighted by more than just unwinding in Chinese trade financing.

The slowdown in China's macro dynamics has broadened throughout the credit and wholesale factory chains as the prolonged deflation in producer prices and 4 1/2-year lows in consumer prices carries red flags for Chinese imports as the wholesale price contraction makes its way into the consumer price level. Copper's overnight damage was attributed to the World Bank's downgrade of 2015 world growth to 3.0% from 3.4%, but we consider Tuesday's release of Chinese trade data showing the 6th monthly decline in imports over the last 10 months, as the greater catalyst - even if the report was overshadowed by rising (and irrelevant) exports.


Another 15% decline?

The charts below show the sixth weekly increase in copper warehouse inventories at the London Metals Exchange (longest rise since March-April 2013) and the persistent positive correlation between copper prices and the AUDUSD exchange rate. If copper sticks to its historical trend-reversion and reaches its 200-month moving average as has been the case in each 6 years, then another 15% decline towards $4855 is a possibility for 2015. This becomes even more plausible when consider that copper inventories are up only 33% from their 2014 lows (compared to 220% in early 2013 and 118% in 2010, both periods when China's economy grew stronger than today).

LME Copper Stocks and Monthly Copper Price Charts
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