Copper challenged by China headwinds Copper challenged by China headwinds Copper challenged by China headwinds

Copper challenged by China headwinds

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Copper futures in London and New York continue to defy gravity, trading sideways for months while the rest of the industrial metal sector has suffered steep declines amid growth concerns, not least in China where the economic outlook continues to deteriorate. Key support is currently being challenged and given multiple uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher copper prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year.


Today's Saxo Market Call podcast
Global Market Quick Take: Europe
COT: Speculators pull out of metals and agriculture, retain energy positions


 

Copper futures in London and New York continue to defy gravity, trading sideways for months while the rest of the industrial metal sector has suffered steep declines amid growth concerns, not least in China where the economic outlook continues to deteriorate. The Bloomberg Industrial Metal index which tracks the performance of copper with a weighting of 35.9%, aluminium (27.4%), zinc (16.1%), nickel (14.2%) and lead (6.4%) trades down 16.6% on the year and near last year’s low point when China’s prolonged Covid lockdown hurt sentiment and not least demand from the world’s top consumer.

The current weakness, as mentioned, continues to be driven by global growth concerns with Europe toying with recession while concerns about the US economic outlook continues to linger. Most importantly however is the Chinese government’s failure, so far at least, to kickstart the economy with recent economic data weakness sending the renminbi down to a November 2022 low as the People's Bank of China cut rates in order to support the economy.  

15olh_ind1

However, while the industrial metal weakness led by nickel and zinc has created a challenging environment for investors, copper remains resilient, and despite an environment of stagnant manufacturing PMIs, normally well correlated with copper demand, Chinese demand has remained surprisingly robust. Not least driven by strong, and government supported, green transition demand towards batteries, electrical traction motors, energy storage and grid upgrades. 

Apart from the mention weakness in China and global manufacturing PMI weighing on prices, copper’s very strong correlation with the Chinese Renminbi continues to challenge the metal’s short-term resolve, after the latest rate cuts from the PBoC drove the offshore Renminbi to the lowest level against the dollar since last November, and it currently sits less than 1% above the 2022 multi-year low. 

Against these headwinds, copper has nevertheless managed to perform significantly better than its peers, not least due to low level of stocks held at warehouses monitored by the three major exchanges. However, after hitting an eight-month low last month at 224,000 tons, total inventories have since recovered to 250,000, thereby adding some short-term pressure on prices.

The lack of big mining projects to ensure a steady flow of future supply continues to receive attention from long-term focused investors as it supports our structural long-term bullish outlook, driven by rising demand for green transformation metals and mining companies facing rising cash costs driven by higher input prices due to higher diesel and labour costs, lower ore grades, rising regulatory costs and government intervention, and not least climate change causing disruptions from flooding to droughts. 

Months of rangebound trading combined with the recent weakness have resulted in low conviction among speculative traders such as hedge funds. The result being a net position hovering close to unchanged with the latest reporting week seeing a fresh net short in HG copper futures, the fifth time since March when the net position has flipped between long and short. 

15olh_ind2

Given multiple uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher copper prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year. 

From a technical perspective, HG copper is currently trading near a lower rising trendline from the 2020 pandemic low, on the daily and weekly chart around $3.67. A close below combined with an RSI reading below 40 (last at 36.3) may point to further short-term weakness towards $3.56, the May closing low, while a break below would confirm an extended down trend. 

15olh_ind3
Source: Saxo

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.