Wednesday, January 21, 2009

Wednesday Commodities Round-Up

Today I'm going to look at Copper. Copper is used in many different industrial settings, so the price of copper is a good indicator of future economic activity. Please click on all images for a larger image

Notice the following on the monthly chart:

At the end of 2003, prices broke out in a big way, increasing from 1.00 to 1.50 by the end of 2004. By the end of 2005 prices more than doubled, closing near over 2.000. In 2006 prices really took off, but then they consolidated in a triangle pattern until mid-2008. Then prices dropped like a stone -- moving lower by 50% plus in roughly 6 months time.

On the weekly chart, notice the prices had some really big gaps down starting at the end of the second quarter. Also note the prices moved through key technical support levels as well.

This chart shows a massive move out of the copper market over the last 6-9 months. My guess is some of this is speculators getting out. However, I also think there is a great deal of bearishness out there regarding the economy which makes copper unattractive.

Consider the following points from the latest ISM manufacturing report:

"Manufacturing activity continued to decline at a rapid rate during the month of December. The decline covers the full breadth of manufacturing industries, as none of the industries in the sector report growth at this time. New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948. Order backlogs have fallen to the lowest level since ISM began tracking the Backlog of Orders Index in January 1993. Manufacturers are reducing inventories and shutting down capacity to offset the slower rate of activity."

In December, none of the manufacturing industries reported growth. The industries reporting contraction in December — listed in order — are: Nonmetallic Mineral Products; Wood Products; Fabricated Metal Products; Printing & Related Support Activities; Textile Mills; Plastics & Rubber Products; Paper Products; Transportation Equipment; Machinery; Primary Metals; Electrical Equipment, Appliances & Components; Chemical Products; Computer & Electronic Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Furniture & Related Products. Two industries reported no change in activity compared to last month: Apparel, Leather & Allied Products; and Petroleum & Coal Products.

And this is from the latest industrial production numbers from the Federal Reserve:

Industrial production fell 2.0 percent in December, and declines were again widespread. Output was revised up in October, but it was revised down in November; for the fourth quarter as a whole, total industrial production decreased 11.5 percent at an annual rate. At 103.6 percent of its 2002 average, output in December was 7.8 percent below its year-earlier level. In December, manufacturing production dropped 2.3 percent. The output of mines moved down 1.6 percent, and the output of electric and gas utilities was little changed. Capacity utilization for total industry fell to 73.6 percent in December, a level 7.4 percentage points below its average level from 1972 to 2007.

Simply put, this is not an environment where copper is widely used.