The Rebound in Copper Prices Will Be Short-Lived

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Source: Thinkstock

Source: Thinkstock

After crashing from about $3.20/lb. to $2.90/lb. in early March, copper prices have rebounded to over $3/lb. While this has turned some people bullish, I still think there is downside left in copper prices, and investors looking to take positions in copper mining companies such as Southern Copper (NYSE:SCCO) or Freeport McMoRan (NYSE:FCX) should hold back for now.

We recently saw an extremely bearish market phenomenon for copper that confirms my bearishness. On Tuesday, the world’s top copper producing county — Chile — experienced a tremendous earthquake that came in at 8.2 on the Richter scale. While the copper price spiked a couple of cents on this news, it quickly came back down so that the price is actually slightly down so far this week. This means that investors are more concerned that copper is overvalued and that the weakening global economy will reduce demand. As a result, they took the brief spike on Wednesday morning to take profits.

While the earthquake didn’t cause any major copper mines to shut down, there were concerns that some Chilean ports would shut down temporarily and that this would reduce the nation’s copper exports. This has a real impact on supply, and in a bullish market it would have caused a much larger spike that probably would have been sustained. Since such a spike didn’t take place, I think that copper is getting ready to roll over and hit a new low for this downtrend. What is sending copper prices lower? There are a couple of catalysts.

First, as previously mentioned, there has been weak global economic data coming out over the past few months. A lot of this has been coming from developing market regions — most notably China. However, we also saw weak economic data come out of the U.S. This came in the form of weak retail sales out of companies such as Costco (NASDAQ:COST), Home Depot (NYSE:HD), and Wal-Mart (NYSE:WMT). The weakness in retail is evidenced by the underperformance of the SPDR S&P Retail ETF (NYSEARCA:XRT) (down 1.8 percent year-to-date) versus the S&P 500 (up 2.1 percent year-to-date.) Since copper is so ubiquitous in consumer and industrial goods, it follows that if demand for these goods falls that demand for copper falls as well.

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