Industrial metals prices weighed down by trade, demand fears

Copper attempting a fresh breakout

Ole Hansen

Head of Commodity Strategy

Summary:  Copper broke higher last week and is now challenging the downtrend from the 2018 peak. This in response to signs of increased construction activity in China combined with the risk that social unrest may add to the expected lack of supply growth in 2020.


Copper broke higher last week and is now challenging the downtrend from the June 2018 peak. This in response to trade talk hopes, signs of increased construction activity in China combined with the risk that social unrest may add to the expected lack of supply growth in 2020.

Adding to this OECD’s newest data on global leading indicators which hinted that the global economy turned a corner in October, moving from contraction phase into the recovery phase. The uncertainty however is still high and adjustments over the coming months could wash away this on the surface turning point in the global economy.

The quote below is the official press release text.

Stable growth momentum is anticipated in the euro area as a whole, including France and Italy, as well as in Japan and Canada. Signs of stabilising growth momentum are now also emerging in the United States, Germany and the United Kingdom, where large margins of error remain due to continuing Brexit uncertainty. Among major emerging economies, stable growth momentum remains the assessment for Brazil, Russia and China (for the industrial sector). On the other hand, the CLI for India continues to point to easing growth momentum.” (OECD – Paris, 9 December 2019)

10OLH_COP1
Source: Saxo Bank

China’s import of copper concentrate, used as raw materials in copper smelting, hit a record last month while the level of copper inventories in warehouses monitored by the three major exchanges in London, New York and Shanghai have dropped to 334k tons, the lowest since January.

These developments mean that copper is well exposed to a potential recovery in global growth or increased fiscal spending from governments picking up the baton from Central Banks failed negative interest rate policies.

10OLH_COP3

LME Copper trades back above the important $6000/t level while HG copper has broken a trifecta of resistance as per the chart below. In order for the rally to continue towards the next level of resistance at $2.80/lb and more importantly $3.0/lb we need some additional clarity from the ongoing trade negotiations between China and the U.S.

On Sunday the U.S. is due to increase tariffs by an additional $160 billion on Chinese imports. These will among a big list of goods impact toys and smartphones. The latest pick up in copper prices came after U.S. Agriculture Secretary Sonny Perdue said that the U.S. is unlike to impose these extra tariffs.  

Hedge funds have traded HG copper from the short side since January. It culminated in a record 75,000 lots (850k tons) short back in July before being cut to 18k lots in early November. Since then short positions began to rebuild and the latest Commitments of Trader report from the CFTC covering the week to December 3 showed a 22% increase to 44,500 lots.

The latest rally and breakout is likely to have further reduced short positions. However, the question remains if the outlook has improved enough to see the return of a speculative long position. The outcome of the current trade talks probably hold the key to this question. 

10OLH_COP2
Source: Saxo Bank

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)

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.