Copper May Gain on China Rate Cut, Fed Hopes

Copper is range-bound after hitting a 2012 low this week, and cautious optimism is nudging bargain hunters to shore up the red metal. Looking ahead, investors are expecting to benefit from China’s latest rate cut, which should boost demand in the world’s biggest copper-consuming country. There is also growing speculation that the Federal Reserve may step in to support the still fragile economic recovery, potentially offsetting sluggishness in the manufacturing sector. Hopes that Europe will unveil another stimulus plan that could spur greater need for base metals worldwide are also rising.

The People’s Bank of China’s benchmark one-year deposit rate was cut by 0.25 percent to 3.25 percent, while its one-year lending rate was cut to 6.31 percent. Banks will be able to offer a 20 percent discount on the benchmark lending rate. The rate cut, the first since 2008, is expected to increase corporate investments as well as personal spending in China, which accounts for over 40 percent of the world’s copper market.

The Chinese rate cut had only a mild impact on base metal prices, but they are expected to follow the lead of global stock markets, which rose on the news. China’s monetary easing provides welcome relief, as the world’s largest economy continues to show signs of weakness.

Two straight months of decline in demand for US core capital goods such as heavy machinery and computers rattled market confidence earlier this week. The Department of Commerce reported that the figure fell 2.1 percent in April from the previous month, having dropped 2.3 percent in March. Factory orders fell 0.6 percent in April overall.

Indeed, on Thursday Federal Reserve Chairman Ben Bernanke told members of the Joint Economic Committee that Europe’s economic woes in particular may put US economic recovery at risk. At the same time, however, investors are expecting more stimulus from the Fed, especially through bond-buying. Bernanke stated that “[a]s always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

Bernanke’s sentiments were echoed on Wednesday by both Federal Reserve Bank of San Francisco President John Williams and the Atlanta regional Fed President Dennis Lockhart, who both stressed the Fed’s readiness to take action in the event of economic downturn.

Investors will continue to monitor the situation in Europe closely, especially as the European Central Bank stated that it is ready to take measures as needed to step up growth, and will keep close tabs on the G20 summit meeting in Mexico that begins on June 18, the day after elections in Greece.

In late afternoon trade Thursday, COMEX copper for July delivery was down 0.1 percent at $3.37 a pound.

Company news

The sovereign wealth fund of Qatar has raised its holding in Xstrata (LSE:XTA) to over 10 percent, making it the second-largest shareholder in the company after Glencore International (LSE:GLEN). Analysts widely believe that Qatar will support Glencore’s bid for Xstrata when it comes up for a vote at Xstrata’s July shareholder meeting.

Ivan Glasenberg, the CEO of Glencore, has invested $15.5 million for 2.9 million shares in his own company, bringing his stake to nearly 16 percent. Glasenberg funded the acquisition through the $110 million in dividends secured from existing shares in the company.

Chinalco Yunnan Copper Resources (ASX:CYU) reported that its joint venture with Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) has identified high-grade copper as well as zinc and molybdenum sulphides at its Candelabro project in Chile.

“Current field work and new mapping by the new CYU Chilean team has discovered porphyry outcropping at surface and exposing what is encouraging leached cap texture. The current campaign will end with the drilling of CAND0008 which is currently underway. We will then move to Caramasa to drill that project while planning for the second round of drilling to build on the success of our initial drilling at Candelabro,” stated Jason Beckton, managing director of Chinalco Yunnan Copper.

Meanwhile, there is growing concern about unrest at Freeport-McMoran’s (NYSE:FCX) Grasberg mine in Indonesia. Speculation has been mounting since last week that workers are preparing to go on strike yet again, after the company shut down production at the site for over two weeks in February and March. Miners’ union spokesperson Juli Parorrongan told Bloomberg that while the union is in talks with Freeport-McMoran’s management, “hopefully we’ll reach an agreement within two weeks otherwise I can’t rule out another strike.”

As for Anglo American (LSE:AAL), its outlook has been downgraded by Morningstar analyst Daniel Rohr, who estimates the company’s fair value at 2,200 pence a share, down from the earlier estimate of 2,600 pence.

“Commodity price assumptions are the primary drivers of our valuation of Anglo. Our fair value estimate of GBX 2,200 per share incorporates the following key mid-cycle commodity price assumptions: copper at $2.50 per pound, platinum at $1,700 per ounce, thermal coal at $100 per ton, metallurgical coal at $200 per ton, and iron ore at $90 per ton (CFR China),” Rohr stated.

Junior company news

The president, director, and CEO of Panoro Minerals (TSXV:PML), Luquman Shaheen, said he expects to have an extensive report on the potential of the Cotabambas project in Peru by next month. The site has the potential to reach 200 million tons and beyond, Shaheen told analysts at a presentation in Washington, DC. The site is surrounded by a number of other projects, including Xstrata’s Las Bambas and Antapaccay projects and Grupo Mexico’s Los Chancas project. Shaheen said that Panoro should easily find a partner to develop the site given its outlook; Panoro Minerals is therefore looking to further develop its other projects, including its Antilla project, also in Peru.

Nautilus Minerals’ (TSX:NUS) share price rebounded on Thursday after a conference call with investors. The call followed last week’s announcement that Nautilus is in dispute with the government of Papua New Guinea (PNG) over funding for its Solwara 1 project offshore of PNG. Share prices had fallen by over a third after the deep water mining company’s announcement, as Nautilus cautioned about potential project delays and cost increases. Investors were somewhat heartened, however, by the conference call, as Nautilus outlined its hopes to reach a speedy resolution with PNG and to secure additional funding either through capital raising or joint ventures. It also said the potential delay in building vessels could be resolved, as it looks to continue with underwater mining for copper and other metals off the shores of Tonga and Fiji as well as PNG.

 

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.