Copper and platinum enjoy green transformation tailwind

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector remains at the center of the "everything up" rally currently unfolding across markets. Ample liquidity provided by governments and central banks together with expectations for a post-pandemic growth sprint have turbo charged the sector at a time where pockets of supply tightness have started to emerge. Not least industrial metals such as platinum and copper, both receiving increased attention as metals in tight supply that are needed to support the green transformation.


The commodity sector remains at the center of the “everything up” rally currently unfolding across many different asset classes. Ample liquidity provided by governments and central banks together with expectations for a post-pandemic growth sprint have turbo charged the sector at a time where pockets of supply tightness have started to emerge. Thereby supporting investment demand from investors both hungry for (roll) yields and in search for investments that can provide some cover against an expected rise in inflation.

In our recently published Quarterly Outlook we highlighted the fundamental reasons why we see the emergence of a new commodity bull market in 2021. Part of the heightened focus being directed towards metals, not only gold at a time of very low negative real rates and the most relaxed monetary policy in history, but also and especially towards those needed in the green transformation agenda.

Source: Saxo Group

Topping the list in terms of performance following the March 2020 collapse, we find metals such as silver (XAGUSD) given its dual usage as an investment and industrial metal, where especially the photovoltaic (PV) market is expected to be strong as many countries embark on renewable energy projects.

The platinum (XPTUSD) market has received a major boost during the past year and from trading at a +1000 dollar discount to gold in early November, the spread has since contracted by more than 400 dollars with platinum rising to a six-year high above $1200/oz.  The latest rally followed news that China's auto sales surged in January, up 30% from last year and the 10th month of straight gains. This at a time where years of platinum oversupply as the automobile industry turned their attention to palladium has started to change. According to the World Platinum Investment Council, the substitution back to platinum (from palladium) has already started but the extent to which is currently being kept a secret by the major catalyst manufacturers Johnson Matthey, BASF and Umicore. 

What is known, however, is the pick-up in investment demand via ETF’s and a lesser extent futures has risen strongly during the past few years with total ETF holdings currently at a near record 3.9 million ounces. Combining the ounces held by futures exchanges, investment demand currently accounts for close to 45% of the known above ground stocks (AGS). The move towards an expected supply deficit is occurring at a time of increased focus on tightening emission regulation in regular combustion engines while accelerating green hydrogen production has increased demand for platinum-based electrolyser capacity.

Having been in a downtrend for nearly a decade, platinum’s breakout last November helped attract renewed investment demand, not least after gold hit $2000/oz and its premium to platinum rose above $1000/oz. These developments helped attract increased switching activity between the two metals.

Source: Saxo Group

Dr. Copper (COPPERMAR21 & HGH1) - used in everything from wiring and electronics to electrical vehicles, and as such a good indicator of global growth and activity, has rallied to an eight year high on a wave demand optimism as governments around world unleash green economy initiatives. Last week it briefly challenged support at $2.50 after China tightened liquidity before an overnight rally took it to $3.7850, the highest level since October 2012. This after data showed Chinese January factory-gate prices rose for the first time in a year, thereby raising the risk of China exporting inflation to the rest of the world. 

February is typically the weakest point in any year for copper demand as the Chinese Lunar New Year holiday reduce demand from the world’s biggest consumer. Yet almost all signals indicate a tightening market with the lack of mine supply growth pointing towards a looming deficit. The Spring months are likely to bring a fresh demand boost as the Covid-19 cloud continues to lift and as governments embark on green-focused spending plans. A demand boost that the supply side appears to be ill-positioned to meet.

Copper inventories monitored by the three major exchanges in New York, London and Shanghai has fallen to a multi-year low at 215k tons, less than half of the 522k average seen during the past five years. Something that is also being reflected in the forward curves where the front of the LME copper curve is showing rising backwardation, a sign of tightening spot market availability.

However, while the price has rallied to a near decade high, speculators in COMEX HG futures have been more hesitant. Currently they hold a net-long of 78k lots, close to a three year high but 38% below the record from September 2017. Furthermore the position has stayed relatively constant since September. Another measure indicating a not yet stretched market is the long/short ratio. At 3.5 longs per one short, the ratio is well below the record 6.4 from 2017. 

As per the chart the retracement seen during the +60% run up since the March 2020 low has been very shallow with buyers emerging on each attempt. Most recently the price found support at $3.50/lb before embarking on the latest upside extension which has the market pointing at $4/lb, the 2012 high and a key psychological level.

Source: Saxo Group

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 (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zürich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. 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. The KIDs can be accessed here or within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.