Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
Copper holds support despite weak China PMI
Ole Hansen
Head of Commodity Strategy
Summary: Copper futures trade softer for a second day but remain above recently established support levels, with the latest weakness once again being driven by the prospect of soft demand in China, the world’s top consumer of metals, after data revealed another monthly drop in China’s manufacturing PMI index. We maintain a medium-term bullish outlook for copper but given current uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher industrial metal 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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Global Market Quick Take: Europe
Copper futures in London and New York trade softer for a second day but remain above recently established support levels, in High Grade at $3.54 a pound and LME at $7850 a ton. The latest weakness once again being driven by the prospect of soft demand in China, the world’s top consumer of metals, after data revealed another monthly drop in China’s manufacturing PMI index. It signalled contraction after falling to 48.8 in May, the lowest reading since last December, while missing estimates of a 49.5 print.
It highlights the current challenge industrial metals as well as iron ore is going through as the post-pandemic recovery in China has proven to be much less commodity intensive than earlier government supported growth sprints. In addition, uncertainty about the US debt ceiling, the direction of short-term rates and recent dollar strength, not least against the Chinese renminbi have all acted as a drag on the market, allowing speculative short sellers to gain control of the price action.
The copper market has responded to these developments by falling back to levels seen last November when the foundation for the China reopening rally was laid. From a low then around $3.54 a pound, the HG futures contract went on to reach a March $5.04 a pound high before returning to the starting point. As per the two charts below, developments in China remain key drivers with PMI and Renminbi weakness driving prices lower while supporting increased short-selling interest from money managers such as hedge funds and CTA’s.
These latest developments have further reduced the focus on an overall structural long-term story of support, 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.
These concerns were discussed recently at a 121 Mining Investment event in Melbourne, as concerns grow that the world will not be able to produce enough copper, lithium, aluminum, and other metals vital for electrifying the world. In an update from the event, Reuters wrote that most speakers made the same point: there is not enough production to meet expected demand, there are not enough projects in the pipeline, and even when new mineral deposits are discovered, the regulatory and financial barriers to developing them take years to navigate.
Overall, however, 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 industrial metal prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year.
High Grade Copper has slumped back to a November low, but so far support is holding at $3.54 ahead of $3.50, a 50% retracement of the 2020 to 2022 rally. Hedge funds selling in recent weeks have seen the net position swing from a 20k contract long to a 16.4k contract short in the latest reporting week to May 23. At this point, a break back above an area of resistance around $3.80 to $3.82 is the minimum requirement for a change in sentiment to take hold.
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