Industrial metals prices weighed down by trade, demand fears

Copper attempting a fresh breakout

Ole Hansen

Head of Commodity Strategy

Summary:  Copper broke higher last week and is now challenging the downtrend from the 2018 peak. This in response to signs of increased construction activity in China combined with the risk that social unrest may add to the expected lack of supply growth in 2020.


Copper broke higher last week and is now challenging the downtrend from the June 2018 peak. This in response to trade talk hopes, signs of increased construction activity in China combined with the risk that social unrest may add to the expected lack of supply growth in 2020.

Adding to this OECD’s newest data on global leading indicators which hinted that the global economy turned a corner in October, moving from contraction phase into the recovery phase. The uncertainty however is still high and adjustments over the coming months could wash away this on the surface turning point in the global economy.

The quote below is the official press release text.

Stable growth momentum is anticipated in the euro area as a whole, including France and Italy, as well as in Japan and Canada. Signs of stabilising growth momentum are now also emerging in the United States, Germany and the United Kingdom, where large margins of error remain due to continuing Brexit uncertainty. Among major emerging economies, stable growth momentum remains the assessment for Brazil, Russia and China (for the industrial sector). On the other hand, the CLI for India continues to point to easing growth momentum.” (OECD – Paris, 9 December 2019)

Source: Saxo Bank

China’s import of copper concentrate, used as raw materials in copper smelting, hit a record last month while the level of copper inventories in warehouses monitored by the three major exchanges in London, New York and Shanghai have dropped to 334k tons, the lowest since January.

These developments mean that copper is well exposed to a potential recovery in global growth or increased fiscal spending from governments picking up the baton from Central Banks failed negative interest rate policies.

LME Copper trades back above the important $6000/t level while HG copper has broken a trifecta of resistance as per the chart below. In order for the rally to continue towards the next level of resistance at $2.80/lb and more importantly $3.0/lb we need some additional clarity from the ongoing trade negotiations between China and the U.S.

On Sunday the U.S. is due to increase tariffs by an additional $160 billion on Chinese imports. These will among a big list of goods impact toys and smartphones. The latest pick up in copper prices came after U.S. Agriculture Secretary Sonny Perdue said that the U.S. is unlike to impose these extra tariffs.  

Hedge funds have traded HG copper from the short side since January. It culminated in a record 75,000 lots (850k tons) short back in July before being cut to 18k lots in early November. Since then short positions began to rebuild and the latest Commitments of Trader report from the CFTC covering the week to December 3 showed a 22% increase to 44,500 lots.

The latest rally and breakout is likely to have further reduced short positions. However, the question remains if the outlook has improved enough to see the return of a speculative long position. The outcome of the current trade talks probably hold the key to this question. 

Source: Saxo Bank
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