Copper drops as China cuts capacities in some industries

Copper fell on Friday as the Chinese Ministry of Industry and Information Technology announced yesterday that 1 400 companies in 19 industries will have to cut excess production capacity this year. This comes as a part of Premier Li Keqiangs efforts to restructure the countrys economy in order to achieve a slower but more sustainable growth.

On the Comex division of the New York Mercantile Exchange, copper futures for September delivery traded at $3.138 a pound at 12:04 GMT, down 1.48% on the day. Prices held in range between days high at $3.193 a pound and low of $3.136, the lowest since July 19. The industrial metal remained unchanged on Thursday and is marking a 0.2% weekly decline after slipping 0.24% the previous week.

The red metal was pressured recently as China data showed the countrys manufacturing sector, which accounts for 40% of global consumption, slowed down to an 11-month low. The flash HSBC/Markit PMI fell to 47.7, compared to June’s final reading of 48.2 and if confirmed in the final report on August 1, it will be the lowest in 11 months. Readings below 50 indicate contraction in the respective sector. Also, a sub-index that measures employment fell for a fourth consecutive month below 50 to 47.3 in July, below June’s 47.7 reading and the the weakest since March 2009.

Meanwhile, the industrial metal was also pushed down as Goldman Sachs said in a report today that global copper surplus may as much as double by 2015 and total 500 000 tons, up from 257 000 tons in 2013.

Copper continued to fall on Friday as the Chinese Ministry of Industry and Information Technology ordered over 1 400 companies in 19 industries to cut surplus production capacity. Excess capacity must be idled by September and eliminated by the end of the year. According to Barclays Plc., the country produced 5.82 million tons of refined copper last year. This year, 654 000 tons of copper capacity must be shut down.

Nic Brown, head of commodities research at Natixis SA in London, said by e-mail for Bloomberg: “The market is already very bearish and is therefore likely to interpret this as further evidence of a slowdown.”

The cut of overcapacity comes as part of Premier Li Keqiangs efforts to restructure the countrys economy in order to achieve a slower but more sustainable growth. Chinas overproduction has been pushing down industrial goods prices and put companies profits at risk, while the economy has been steadily slowing down.

Raymond Yeung, a Hong Kong-based economist at ANZ Banking Group Ltd., said for Bloomberg: “This is a real move and is very specific compared with previous high-level conceptual framework for economic restructuring. They maintain the overall tone that they’re not focusing on the quantity of growth but the quality of growth.”