HardAssetsInvestor

Written by Sumit Roy  |

December 01, 2011

Base Metals Report: Copper May Rally Above $9000 mt ($4.08/lb) As China Loosens Monetary Policy

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Most base metals show signs of bottoming as global economic outlook improves.

After two months of consolidation, it looks like base metals could finally be on the cusp of an upswing. European sovereign debt worries have faded a bit, as policymakers made it clear that they would do what was necessary to keep the eurozone intact. What they ultimately do remains to be seen, but investors appear to be betting that a solution will be found given that the stakes are so high.

That retrenchment in eurozone fears has allowed investors to instead focus on much stronger fundamentals in the United States and elsewhere.

The world’s largest economy seems to be entering a self-sustaining recovery, as economic indicators come out better than expected despite weak consumer and investor sentiment over much of the second half of this year.

Though employers have every incentive to minimize their workforces given the uncertainty about Europe and the fate of the global economy, hiring in the U.S. has continued at a slow but steady pace. If the economy is holding up so well in the face of such a significant head wind, it stands to reason that it could do even better in the event of any relief in Europe.

That obviously bodes well for the economically sensitive base metals complex. But while U.S. strength is a positive, the most important economy when it comes to base metals performance is China. In that vein, the news is mixed, but encouraging.

China's PMI Manufacturing index for November fell to 49 from 50.4 in the prior month, putting the gauge below the 50 threshold that separates contraction and expansion for the first time since February 2009.

The weak reading explains why the People's Bank of China loosened monetary policy earlier this week by cutting required reserve requirements on commercial lenders. Given that China has a lot of room to stimulate its economy after having tightened monetary policy for more than a year, this slowdown in economic activity is not seen as concerning.

China’s Consumer Price Index grew by only 5.5 percent in October, and may grow by 4.5 percent in November. Lower inflation and weaker economic activity means that China may be set to loosen monetary policy further.

If China is successful in stimulating the economy, that will be a positive for base metals. In such a scenario, copper will likely return to levels above $9,000/mt ($4.08/lb).