Quarterly Outlook
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Copper: supply fundamentals trump weak sentiment
Ole Hansen
Head of Commodity Strategy
Summary: Copper is showing signs of stabilizing despite a current negative sentiment towards China-centric commodities. While the overall macro-economic sentiment remains weak, not only in China but also globally due to heightened recession fears, the copper market is showing emerging signs of fundamental strength as mining companies struggle to meet their production targets while demand, surprisingly from China, has lifted tightness in the London market.
Copper is showing signs of stabilizing despite an overriding negative sentiment towards China-centric commodities such as copper, cotton and now also crude oil after both WTI and Brent slumped below support on Wednesday. The country’s battle with Covid and the governments steadfast support for its zero tolerance has led to renewed lockdowns and restrictions of movements in regions with around 300 million citizens and that account for one-quarter of Chinas GDP.
It is therefore interesting to note that copper has stopped falling and so far, this week has managed a small bounce after finding support last week at $3.36 per pound. While the overall macro-economic sentiment remains weak, not only in China but also globally due to heightened recession fears, the copper market is showing emerging signs of fundamental strength as mining companies struggle to meet their production targets – top producer Chile has seen its exports slump to a 19-month low due to water restrictions and lower ore quality - while demand from China, surprisingly is showing signs of strengthening.
The current energy crisis in Europe and the increased focus on de-carbonization across the world, not least in China, remains the key driver behind our long-term bullish outlook for copper.
These latest developments have driven the spread between spot and the three-month contract on LME to at $145 per tons high today. A backwardation of this magnitude, which normally signals tighter conditions, was last seen last November. Adding to this a continued drop in inventories monitored by the three major copper futures exchanges in London, New York and Shanghai to 193,000 tons, the lowest since January, and speculators are beginning to have second thoughts about continuing to hold net short positions.
For the short-term prospect to improve further the recent pickup in demand from China needs to be driven by real demand. At this point it is unclear whether the increase purchases of copper are due a re-opening of the arbitrage window between LME and Shanghai, restocking or just simply a hedge against a weaker Yuan.
Having found support last week at $3.36/lb, after retracing 61.8% retracement of the July to August rally, copper is currently staring at resistance in the $3.54 area where recent lows and the 55-day moving average merges. For a real upside and trend reversal to occur the price needs to break above $3.78/lb while a break below $3.36/lb could see the metal take aim at $3/lb.
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