Industrial metals prices weighed down by trade, demand fears Industrial metals prices weighed down by trade, demand fears Industrial metals prices weighed down by trade, demand fears

Copper's rally, fueled by momentum, halts amid weakening fundamentals

Ole Hansen

Head of Commodity Strategy

Key points

  • Copper's momentum-driven rally halted by deteriorating short-term fundamentals
  • Our long-term price supportive outlook has not changed
  • Rising China stockpiles and drop in import premiums point to short-term demand softness
  • Hedge funds resilience may determine the size of the correction

Copper trades lower for a third day as the month-long momentum-driven rally shows signs of running out of steam, primarily due to softness in the short-term demand outlook in China, combined with the risk of long liquidation from hedge funds who amassed a major long position within the last couple of months. Overall, we maintain a long-term positive outlook for the metal in anticipation of robust demand from among others towards electric vehicles, grid infrastructure and AI data centres at a time where production from existing miners looks set to fall in the coming years.

Since February, the macro and momentum-focused rally has helped attract a great deal of speculative interest, which helped drive additional gains, culminating on Tuesday when futures prices in New York and London reached fresh two-year highs. However, not least the brief rally above USD 10,000 per tonne on the London Metal Exchange helped attract selling from traders struggling to find justification for the latest move at a time where data from China points to demand softness.

The first month High Grade copper futures contract reached a two-year high earlier in the week before profit-taking emerged to drive it lower, in the process breaking the steep uptrend from late March. Using Fibonacci retracement levels, the first level of support can be found around USD 4.41 per pound followed by USD 4.33.

Source: Saxo

Signs of softness have started to emerge in China, the world’s top consumer of metals, including copper. So much that Reuters is carrying a story about Chinese copper producers planning to export up to 100,000 metric tonnes of copper. An unusual step, rarely seen from a country that is generally a copper importer, which is seen in order to cool a rally that has led to worries about slowing demand from end users.

The below chart highlights two other indicators that point to current softness in demand. Copper stocks monitored by the Shanghai Futures Exchange have recently surged to 300,000 tonnes, a level last seen four years ago when demand collapsed during Covid. Some of the increase is likely to have been driven by traders, hoarding metals in order to seek a hedge against the possible risk of a weaker yuan, but overall it does not support higher prices in the short term. In addition, the premium importers are prepared to pay over LME copper has recently slumped to zero, a level that according to those with access to the data, has not been seen since the Great Financial Crisis in 2008.

Until we see an improvement in the mentioned data, the potential for a period of consolidation, perhaps even a deeper correction seems increasingly likely.

The depth of the correction currently unfolding will to a large extent depend on whether the market retraces lower to levels that may trigger accelerated long liquidation from funds. During a ten-week period up until 23 April, leveraged speculators from hedge funds to CTAs flipped their position from a 40,000 contract (454k tonnes) net short to a 67,210 contract (762 tonnes) net long, the highest in three years. The bulk of the buying occurred during the past three weeks, during which time the volume-weighted average price (VWAP) was around USD 4.38 per pound, a level which for now is being protected by the above-mentioned support around USD 4.41 per pound.

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Previous "Commitment of Traders" articles

29 April 2024: COT: Gold bulls stand firm despite recent correction
22 April 2024: 
COT: Declining momentum may signal shift toward consolidation
15 April 2024: 
COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: 
COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: 
COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: 
COT: Hedge funds zoom in on crude, copper and silver
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COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: 
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4 Mch 2024: 
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