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: supply fundamentals trump weak sentiment

Ole Hansen

Head of Commodity Strategy

Summary:  Copper is showing signs of stabilizing despite a current negative sentiment towards China-centric commodities. While the overall macro-economic sentiment remains weak, not only in China but also globally due to heightened recession fears, the copper market is showing emerging signs of fundamental strength as mining companies struggle to meet their production targets while demand, surprisingly from China, has lifted tightness in the London market.


Copper is showing signs of stabilizing despite an overriding negative sentiment towards China-centric commodities such as copper, cotton and now also crude oil after both WTI and Brent slumped below support on Wednesday. The country’s battle with Covid and the governments steadfast support for its zero tolerance has led to renewed lockdowns and restrictions of movements in regions with around 300 million citizens and that account for one-quarter of Chinas GDP. 

It is therefore interesting to note that copper has stopped falling and so far, this week has managed a small bounce after finding support last week at $3.36 per pound. While the overall macro-economic sentiment remains weak, not only in China but also globally due to heightened recession fears, the copper market is showing emerging signs of fundamental strength as mining companies struggle to meet their production targets – top producer Chile has seen its exports slump to a 19-month low due to water restrictions and lower ore quality - while demand from China, surprisingly is showing signs of strengthening. 

The current energy crisis in Europe and the increased focus on de-carbonization across the world, not least in China, remains the key driver behind our long-term bullish outlook for copper.

These latest developments have driven the spread between spot and the three-month contract on LME to at $145 per tons high today. A backwardation of this magnitude, which normally signals tighter conditions, was last seen last November. Adding to this a continued drop in inventories monitored by the three major copper futures exchanges in London, New York and Shanghai to 193,000 tons, the lowest since January, and speculators are beginning to have second thoughts about continuing to hold net short positions.

For the short-term prospect to improve further the recent pickup in demand from China needs to be driven by real demand. At this point it is unclear whether the increase purchases of copper are due a re-opening of the arbitrage window between LME and Shanghai, restocking or just simply a hedge against a weaker Yuan.

Having found support last week at $3.36/lb, after retracing 61.8% retracement of the July to August rally, copper is currently staring at resistance in the $3.54 area where recent lows and the 55-day moving average merges. For a real upside and trend reversal to occur the price needs to break above $3.78/lb while a break below $3.36/lb could see the metal take aim at $3/lb.

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/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. 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
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.