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Copper downside risk limited by better than expected Chinese PMI figures

Bnamericas Published: Monday, December 02, 2013

Copper closed Monday at US$3.179/lb cash on the London Metal Exchange, down from the previous session's US$3.187/lb but remaining within recent ranges as better than expected Chinese PMI figures limited a downside trend that started last week.

The final reading of HSBC'sChinese manufacturing PMI for November came in at 50.8, above the flash estimate of 50.4, although still below October's 50.9.

The output component of the PMI rose from 51.1 in October to 52.2 in November and new orders increased to 51.7 from 51.5. New export orders, however, fell from 51.3 to 50.2.

"Overall, today's (Dec 2) PMI was better than expected. But this was the first fall in the headline index since July, which implies that the recovery in industry is faltering," London-based Capital Economics wrote in a note. The official PMI, released on Sunday (Dec 1), suggests much the same, according to the note.

China's official PMI for November was 51.4. Output edged up from 54.4 in October to 54.5 while new orders dropped from 52.5 to 52.3.

The fact that output is outpacing new orders on both PMIs, implies downside risks to production activity, according to Capital Economics.

China consumes around 40% of the world's copper production, making its economy key to global copper demand.

"The fact that the rebound is so imbalanced is a further reason to think it is probably on its last legs," Capital Economics said. "The health of heavy industry is closely linked to official moves over the summer to speed up infrastructure projects and other investment. As policymakers now move to slow the growth of credit, this source of demand is likely to fade in strength."

Meanwhile, HSBC's final PMI reading for the US showed manufacturing rose to a ten-month high of 54.7 in November. October's reading was 51.8. Output, new orders and new export orders all saw an uptick in growth.

COMMODITIES OUT OF FAVOR

The results of Barclays Capital's quarterly global macro survey found that commodities are seeing "very limited investor appetite, with interest focused much more on equities followed by EM."

Demand is seen to be the biggest driver of upside and downside risk to commodity prices in the next six months, according to the results of the survey. The majority of respondents cited weaker EM demand and a slowing Chinese economy as the biggest downside risk, while the greatest upside risk was perceived to be a pickup in commodity demand on brighter global economic growth prospects.

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