Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Copper futures in London and New York trade at a 12-week high buoyed by continued China stimulus, US peak rate speculation supporting industry restocking, the renewable energy sector leads consumption higher. Meanwhile on the supply side we are seeing emerging concerns about strike action in Peru and not least the potential loss of 1.5% of global supply related to shutdown warnings at First Quantum’s giant Cobre Panama mine.
Copper futures in London and New York trade at a 12-week high buoyed by continued China stimulus, US peak rate speculation supporting industry restocking, the renewable energy sector leads consumption higher with better-than-expected demand in China from electrical vehicles, solar panels and the power industry. Meanwhile, the supply side is currently facing the risk of strike action in Peru and not least the potential loss of 1.5% of global supply related to shutdown warnings at First Quantum’s giant Cobre Panama mine.
After once again finding support in the $3.54 per pound area last month, the HG futures contract has returned higher to test strong resistance around $3.83, the 200-day moving average, shown as a 42-week moving average below, and the upper falling trendline from the January high. Meanwhile, RSI closed above 60 on Monday, with the positive sentiment pointing to higher prices. Above, the next key area of resistance can be found around $4.02, the August high while a break below $3.67 would return the market to neutral.
Last week the white metal had its best week since July and together with other industrial metals it has been supported by speculation the Federal Reserve’s aggressive rate hike cycle has reached the end of the road. Earlier this year the sector went through a destocking phase amid high interest rates raising the cost of holding inventories while at the same time putting a brake on economic activity.
During the same time however, a better-than-expected demand situation in China helped underpin prices with the latest data provided by Goldman’s showing 10% year-on-year increase so far this year, with green transformation industries continuing to increase demand. A situation highlighted by a drop in China exchange monitored stocks to the lowest level since 2017, in the process offsetting a rise at the London Metal Exchange, which has been dominated by arrivals from Chile and Russia. The copper premium, or the fee traders pay for imported cargoes at the Yangshan port in Shanghai over benchmark prices on the London Metal Exchange, has because of strong demand reached the highest level in a year, according to Shanghai Metals Market.
Looking ahead, the energy transition is real, and it will continue to create a significant amount of demand for some metals, and given the current uncertainty and rising cost of financing there is a risk that sufficient mining capacity will not be developed in time, potentially forcing up prices for in-demand metals with copper, the so-called king of green metals, once again being singled out given the focus on wind, solar, EV’s and subsequent power-grid related demand.
While the short-term outlook for copper continues to be challenged from the risk an economic slowdown, the lack of big mining projects to ensure a steady flow of future supply in the coming years continues to receive attention from long-term focused investors as it supports a 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, as seen by the current crisis in Panama, and not least climate change causing disruptions from flooding to droughts.
Copper remains the best performing industrial metal this year, trading up 3% despite all the worries related to the Chinese property sector, and together with lead it has so far helped limit the year-to-date sector loss to around 11%, partly offsetting heavy losses in nickel and zinc. Speculators, such as hedge funds and CTA’s, have been holding a relatively small net short position in HG copper since August, and with the gross long and short both staying elevated, it highlights the current range bound market which for a while now has not forced any major change in positioning. That status que is likely to be kept until fresh momentum can be established, either below $3.54 or above the 200-day moving average.
We keep a structural long-term bullish view on copper and with that also copper related mining companies that will benefit from higher prices.