Head of Commodity Strategy, Saxo Bank Group
Summary: The short-term outlook for HG Copper has deteriorated this week following unexpectedly weak readings on manufacturing activity in China and the United States, the world's two biggest consumers of the industrial metal.
Copper, which is widely used as a conductor of heat and electricity, dropped almost 3% yesterday – the biggest fall since last August – to a ten-week low of $2.777/lb, close to its 200-day moving average. The forecast for tight supply, the continued move towards electrification, combined with infrastructure projects, is likely to provide a long-term support for copper. In the short term, however, the focus will primarily be on finding support with $2.717 representing a key line in a sand below $2.777/lb as mentioned.
These and other recent data from the world’s two biggest economies also highlight why the market is increasingly expecting that a trade deal between the two countries will be reached sooner rather than later. A deal will undoubtedly create a lot of market-friendly headlines but we see an overriding risk that it could by over-hyped with weak control mechanisms put in place to police a deal.
While demand may struggle to pick up amid the continued worries about weaker economic growth, the physical market is widely expected to remain tight during the coming years. Inventory levels at exchange-monitored warehouses are currently 442,000 tons, some 24% below the three-year average. The forecast for tight supply the continued move towards electrification combined with infrastructure projects is likely to provide a long-term support for copper.
Just last week in the US, the Democratic congressional leaders emerged from a meeting at the White House and announced that President Trump had agree to pursue a $2 trillion infrastructure plan to upgrade the nation’s highways, railroads, bridges and broadband. The big question, however, remains who should pay for this initiative. Not least considering how the US has become increasingly maxed out on debt and tax cuts which so far have failed to boost the economy.