Head of Commodity Strategy
Summary: Copper futures in London and New York continue to defy gravity, trading sideways for months while the rest of the industrial metal sector has suffered steep declines amid growth concerns, not least in China where the economic outlook continues to deteriorate. Key support is currently being challenged and given multiple uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher copper prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year.
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Copper futures in London and New York continue to defy gravity, trading sideways for months while the rest of the industrial metal sector has suffered steep declines amid growth concerns, not least in China where the economic outlook continues to deteriorate. The Bloomberg Industrial Metal index which tracks the performance of copper with a weighting of 35.9%, aluminium (27.4%), zinc (16.1%), nickel (14.2%) and lead (6.4%) trades down 16.6% on the year and near last year’s low point when China’s prolonged Covid lockdown hurt sentiment and not least demand from the world’s top consumer.
The current weakness, as mentioned, continues to be driven by global growth concerns with Europe toying with recession while concerns about the US economic outlook continues to linger. Most importantly however is the Chinese government’s failure, so far at least, to kickstart the economy with recent economic data weakness sending the renminbi down to a November 2022 low as the People's Bank of China cut rates in order to support the economy.
However, while the industrial metal weakness led by nickel and zinc has created a challenging environment for investors, copper remains resilient, and despite an environment of stagnant manufacturing PMIs, normally well correlated with copper demand, Chinese demand has remained surprisingly robust. Not least driven by strong, and government supported, green transition demand towards batteries, electrical traction motors, energy storage and grid upgrades.
Apart from the mention weakness in China and global manufacturing PMI weighing on prices, copper’s very strong correlation with the Chinese Renminbi continues to challenge the metal’s short-term resolve, after the latest rate cuts from the PBoC drove the offshore Renminbi to the lowest level against the dollar since last November, and it currently sits less than 1% above the 2022 multi-year low.
Against these headwinds, copper has nevertheless managed to perform significantly better than its peers, not least due to low level of stocks held at warehouses monitored by the three major exchanges. However, after hitting an eight-month low last month at 224,000 tons, total inventories have since recovered to 250,000, thereby adding some short-term pressure on prices.
The lack of big mining projects to ensure a steady flow of future supply continues to receive attention from long-term focused investors as it supports our 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.
Months of rangebound trading combined with the recent weakness have resulted in low conviction among speculative traders such as hedge funds. The result being a net position hovering close to unchanged with the latest reporting week seeing a fresh net short in HG copper futures, the fifth time since March when the net position has flipped between long and short.
Given multiple uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher copper prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year.
From a technical perspective, HG copper is currently trading near a lower rising trendline from the 2020 pandemic low, on the daily and weekly chart around $3.67. A close below combined with an RSI reading below 40 (last at 36.3) may point to further short-term weakness towards $3.56, the May closing low, while a break below would confirm an extended down trend.
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