Head of Commodity Strategy
Summary: The industrial metal sector is heading for a monthly loss with the Bloomberg Industrial Metal index trading down 4% to a January 2021 low, and despite the Chinese government ramping up economic support measures the sector continues to suffer amid concerns about the medium-term outlook for demand growth in China and the rest of the world. Losses across the sector was reduced towards the end of month after the Chinese government made a rare mid-year budget adjustment, a move which boosted confidence that Beijing will not tolerate a sharp slowdown in growth and with that demand for key metals
The industrial metal sector is heading for a monthly loss with the Bloomberg Industrial Metal index trading down 4% to a January 2021 low. As per the table below, all the major industrial metals, except tin have suffered setbacks led by zinc and aluminium, while copper has managed to limit its loss to around 2% amid signs of tightening stock levels. Despite the Chinese government ramping up economic support measures the sector continues to suffer amid concerns about the medium-term outlook for demand growth in China and the rest of the world.
Losses across the sector was however reduced towards the end of month after the Chinese government made a rare mid-year budget adjustment, a move which boosted confidence that Beijing will not tolerate a sharp slowdown in growth, and with that demand for key metals. In addition, Wednesday’s FOMC meeting will also be watched closely for any signs of peak rate or statement that may halt the recent surge in bond yields which is hurting investment decision through rising cost of financing.
Earlier this month the London Metal Exchange held its annual LME Week and the mood was somewhat sombre with participants wondering whether a better-than-expected demand situation in China this year can be sustained into 2024 as the risk of slowdown across the world continues to rise amid high interest rates putting a brake on economic activity. On the other hand, there were also signs that the developed market cycle is getting close to a through following months of destocking whilst a peak in US rates would also help support sentiment.
The energy transition is real, and it will create a significant amount of demand for some metals which in turn is leading companies to look where they can reduce the dependency on these. On the other hand the current uncertainty and rising cost of financing will drive investment uncertainty, raising the risk that sufficient supply will not be developed in time, potentially forcing up prices for in-demand metals with copper, the so-called king of green metals, once again being singled out given the focus on wind, solar, EV’s and subsequent power-grid related demand.
While the short-term outlook for copper continues to be challenged, the lack of big mining projects to ensure a steady flow of future supply in the coming years continues to receive attention from long-term focused investors as it supports a structural long-term bullish outlook, 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.
Our copper monitor above highlights some of the current drivers of the copper market, not least inventories where we are seeing declines following a recent build in global stocks held at exchange monitored warehouses, giving enough support for High Grade copper to bounce from key support in the $3.5450 per pound area and LME copper from around $7850 per tons. Copper supply in China is leading the renewed tightening focus after exchange inventories dropped to a 13-month low, while holdings at bonded warehouses fell to a record low, according to Shanghai Metals Market. The London Metal Exchange which led the recent strong buildup in stocks is now also seeing declines.
Leveraged funds such as hedge funds and CTA’s have been trading HG copper futures with a negative bias since August, and in the latest reporting week to October 24, the net short saw a small reduction to 17,844 contracts, not far from a 15-month high at 23,000 contracts from May this year, and should the current recovery continue we may see some additional momentum from funds covering short positions. Apart from stocks and speculators we are also watching movements in the Chinese yuan, as well as the forward curve, given the signal it sends about the cost of holding a position.
The HG copper chart shows how the metal is trying to build an uptrend, which would likely be strengthened on a break above the falling trendline (red line), currently around $3.70. This move comes after several rejections and later bounces from key support at $3.5450. There is, however, strong overhead resistances, most notably around $3.86 where a falling trendline from the January 2022 record peak meets the 200-day moving average. Until that level has been broken, copper will most likely remain rangebound with a cautious bias.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
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)
