Monday, July 6, 2015

Copper prices are down and the reason is China. India will gain but to lose somewhere else
China’s stock market came down faster than it went up. Central Bank’s actions and Govt.’s pledge to support are giving it a breathe but there are many indications that it may not come back quickly. Look at their neighbor Hang Seng index and Copper’s price for instance.

You don’t get to see 1,000 point fall on Hang Seng routinely. More than Greece, it is what is happening in China is affecting it. China’s markets lost $3.2 trillion in last three weeks. The volatility has taken out the nerves of investors. No matter what the Govt. or central banks does, they would not come back in a hurry. Look at the worst performers on Hang Seng index today. They are China domestic market related stocks.

Another indicator is copper prices. China is the biggest consumer of copper followed by Europe. With the economic contraction in both the regions, demand for copper has comes down significantly. So it is reflected in the price. Copper is in bear market for the last 4 years with its prices sliding down continuously. And when it is down 40% (from highs of 2011), volumes traded show a long bar. Someone (or many) holding it as inventory anticipating higher prices lost patience and dumped it. But are the buyers know about ‘Greater Fool’ theory in order to avoid selling at lower prices? Probably yes, unlike stock markets or bond markets, gold or oil, copper is held mostly by who those who needs it (for industrial purposes) rather than for speculations. So if my hypothesis is right, prices may not see a steep fall from here as buyers (with large volume) are finding value at this price but it may not go up as dumping is likely to continue. This would surely affect copper mining countries like Chile, Peru, Australia and China itself. Their copper production will not see much growth and the investments in that sector may not have expected pay-off.

India’s share in copper production is very insignificant so it is a positive with its import costs coming down. Cheaper copper does its bit in cooling down inflation. Is it time to smile for Indians? For consumers, it is ‘Yes’ but for industries it is a ‘No’. Slowing down China will lead to dumping of many other commodities, not just copper but steel too, which would mean bad news for steel factories here. They will have to run factories at a lower utilization levels and keep away the expansion plans. That will hurt investments, new jobs creation etc.

Bursting of bubbles and prices coming back to realistic levels is a common thing across markets. And falling commodity prices would provide a much needed relief for Indian consumers from inflation and that would bring down the interest rates. That cycle has already started. And it would surely help long pending infra projects. But will that kick start new investments to drive growth? New industrial investments of big scale do not happen unless their existing production houses run at full utilization. But with the dumping of commodities, there would not be much rationale to for it. So Capital Goods, Mining and related industry will have to wait longer for their ‘Achhe Din’.