Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Copper update: Sombre outlook weighing on prices
Ole Hansen
Head of Commodity Strategy
Key points in this copper note
- Traders and other insiders at last weeks LME Week gathering in Londong offered a somewhat subdued short term outlook for the sector
- Growth concerns in China and the rest of the world together an uneven green transition rollout weighing on the sector
- Current uncertainty and rising cost of financing will drive investment uncertainty, raising the risk of insufficient future supply
At the annual LME week held in London last week traders and other insiders offered a somewhat subdued outlook for the sector, and since then we have seen copper futures in London and New York drift lower towards key support amid concerns about the short to medium-term outlook for demand growth in China and the rest of the world Overall, the Bloomberg Industrial Metal Total Return Index has suffered a near 15% decline this year, and with its 16% weighting in the overall Bloomberg Commodity Index, it remains the sector together with grains (14% weighting and down 12%) that is currently weighing the most on the overall commodity sector performance.
The table below also shows how copper despite months of China recovery concerns, not least related to its beleaguered property sector has managed to limit its losses for the year go around 4.5%. However, in recent weeks we have seen a rise in exchange monitored stocks pointing to ample supply - a view being supported by a rising contango, and together with the current renminbi weakness, the short-term outlook looks challenged.
Last week the London Metal Exchange held its annual LME Week and while the London West End was buzzing with meetings and cocktail parties, the mood inside the main seminar was somewhat sombre with participants wondering whether a better than expected demand situation in China this year can be sustained into 2024 as the risk of slowdown across the world continues to rise amid high interest rates putting a brake on economic activity. On the other hand, there were also signs that the developed market cycle is getting close to a through following months of destocking whilst a peak in US rates would also help support sentiment.
The energy transition is real, and it will create a significant amount of demand for some metals which in turn is leading companies to look where they can reduce the dependency on these. On the other hand the current uncertainty and rising cost of financing will drive investment uncertainty, raising the risk that sufficient supply 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 remains somewhat challenged, 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 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.
Our copper monitor above highlights some of the current headwinds, not least the recent rise in exchange monitored stock levels, some of which, however, can be explained by higher rates increasing the cost of holding metal, with traders pushing it onto exchanges instead. Rising inventories have also supported a rising contango, normally associated with an oversupplied market where spot prices are cheaper than deferred amid ample supply looking for a home.
A recent surge has seen inventories at LME-monitored warehouses reach a two-year high while cash copper is close to the biggest discount (contango) to the benchmark three-month price since the 1990s. In addition, the ebb and flow of the Chinese renminbi remains another driver and until the recent weakness is halted or reversed a weaker yuan may weigh on copper prices. Speculators in HG copper futures meanwhile remains undecided following months of sideways action, currently holding a small net short position following a couple of weeks of short covering.
Earlier today, the HG Copper futures contract briefly traded below key support in the $3.54/55 per pound area, but with LME copper still holding above its support line at $7870 per tons the selling appetite has so far been muted. That can however change with a clear break below $3.50, the 50% retracement of the 2020 to 2022 rally, potentially fuelling a sell-off towards the $3.24/14 area.
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