Copper holds support despite weak China PMI Copper holds support despite weak China PMI Copper holds support despite weak China PMI

Copper holds support despite weak China PMI

Ole Hansen

Head of Commodity Strategy

Summary:  Copper futures trade softer for a second day but remain above recently established support levels, with the latest weakness once again being driven by the prospect of soft demand in China, the world’s top consumer of metals, after data revealed another monthly drop in China’s manufacturing PMI index. We maintain a medium-term bullish outlook for copper but given current uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher industrial metal 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


 

Copper futures in London and New York trade softer for a second day but remain above recently established support levels, in High Grade at $3.54 a pound and LME at $7850 a ton. The latest weakness once again being driven by the prospect of soft demand in China, the world’s top consumer of metals, after data revealed another monthly drop in China’s manufacturing PMI index. It signalled contraction after falling to 48.8 in May, the lowest reading since last December, while missing estimates of a 49.5 print. 

It highlights the current challenge industrial metals as well as iron ore is going through as the post-pandemic recovery in China has proven to be much less commodity intensive than earlier government supported growth sprints. In addition, uncertainty about the US debt ceiling, the direction of short-term rates and recent dollar strength, not least against the Chinese renminbi have all acted as a drag on the market, allowing speculative short sellers to gain control of the price action. 

The copper market has responded to these developments by falling back to levels seen last November when the foundation for the China reopening rally was laid. From a low then around $3.54 a pound, the HG futures contract went on to reach a March $5.04 a pound high before returning to the starting point. As per the two charts below, developments in China remain key drivers with PMI and Renminbi weakness driving prices lower while supporting increased short-selling interest from money managers such as hedge funds and CTA’s.

These latest developments have further reduced the focus on an overall structural long-term story of support, 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. 

These concerns were discussed recently at a 121 Mining Investment event in Melbourne, as concerns grow that the world will not be able to produce enough copper, lithium, aluminum, and other metals vital for electrifying the world. In an update from the event, Reuters wrote that most speakers made the same point: there is not enough production to meet expected demand, there are not enough projects in the pipeline, and even when new mineral deposits are discovered, the regulatory and financial barriers to developing them take years to navigate.

Overall, however, 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 industrial metal prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year. 

High Grade Copper has slumped back to a November low, but so far support is holding at $3.54 ahead of $3.50, a 50% retracement of the 2020 to 2022 rally. Hedge funds selling in recent weeks have seen the net position swing from a 20k contract long to a 16.4k contract short in the latest reporting week to May 23. At this point, a break back above an area of resistance around $3.80 to $3.82 is the minimum requirement for a change in sentiment to take hold. 

Source: Saxo

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

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

    Read article
  • 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
  • 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
  • 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
  • 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

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.