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’s resilience despite China weakness

Ole Hansen

Head of Commodity Strategy

Key points

  • Copper continues to consolidate amid recent weakness that was triggered by last months premature surge to record highs
  • Having retraced around half the strong rally focus is turning to China and data reflecting the state of the physical market
  • The long-term argument for higher copper prices has not gone away, supported by expected robust demand towards the electrification of the world

Copper's recent consolidation follows a premature surge to record highs last month, driven by momentum-chasing speculators in the London and New York futures markets. This rally deterred demand from physical buyers, particularly in China, the top consumer of copper, where recent data has indicated weakness. Despite setbacks, the industrial metal sector is up around 9% this year, with copper and tin being the best performers.

Source: Saxo

We believe the market direction is correct but question the timing, as fundamental support is needed for sustained price increases. Recent mentions of AI and anticipated power demand for data centres attracted new investors to copper, though some may not fully understand commodity dynamics, where prices are driven by current supply and demand balances.

The copper squeeze, led by the High Grade Copper future in New York, occurred as Chinese stockpiles reached four-year highs, reminiscent of the Covid demand collapse. Additionally, the premium Chinese importers pay over LME copper has disappeared, indicating the rally was exchange-driven, not demand-driven from China. The offshore Chinese yuan near a seven-month low might incentivise stockpiling but makes imports more expensive, potentially deterring buyers.

Long-term fundamentals support robust future demand for copper from electric vehicles, grid infrastructure, and AI data centres, while production may struggle to meet demand, leading to potential supply deficits. Miners need higher prices to justify investments in new discoveries, which take over a decade to yield returns.

Following a near 50% retracement of the rally from the October 2023 low, the High Grade Copper contract has found support ahead of USD 4.35 per pound, the January 2023 high, with resistance currently in the USD 4.55-60 per pound area.

Source: Saxo
The five-year chart, highlighting the current support area around USD 4.35 per pound - Source: Saxo

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