Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude

Gold and silver shines bright ahead of year end

Topping the table for a second month we find precious metals and, while wrong-footed short sellers and geopolitical tensions supported a strong gold rally during October, silver spent November reclaiming lost ground, driven by its relative cheapness to gold and some traders switching their focus to silver as gold approached $2000 and an area that so far has proven difficult to break above.

The tailwinds that have supported these gains are easy to see, not least this past month, when a growing belief in US peak rates drove down the dollar by around 3% against its major G-10 peers while US 10-year Treasuries celebrated their best month since the 2008 global financial crisis with the yield crashing 60 basis points to 4.33%. A turnaround from last month when it was threatening to break above 5%.

The latest trigger came after Fed governor Waller, normally a reliable hawk, suddenly converted to the dovish camp by saying "I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%,". The market concluded that Waller would not have expressed such a major change in stance without a nod from Fed chair Powell, resulting in the market now almost pricing in five full 25 basis points cuts next year with the through in rate cuts expected around December 2025 at 3.5%.

We maintain a bullish outlook for gold into 2024 in the firm belief that rates have peaked and that Fed funds and real yields will start to trend lower. However, with a great deal of easing already priced into the market, the chance of a straight-line rally is unlikely, and both silver and gold will continue to see periods where convictions might be challenged. It is also worth noting the continued lack of demand from ETF investors, not least asset managers who remain sidelined amid the wide gap between gold and US real yields as well as the current high cost of carry which will only come down when the Federal Reserve starts cutting rates.

From a technical standpoint, the 50-day moving average is about to cross above the 200-day and, as long spot gold holds above $2007, the technical setup points to higher prices, with a break above $2063, the August 2020 record closing high, signaling the potential for an extension towards $2130.

Tight supply risks boost commodities from cocoa and coffee to copper

With the current focus on an economic downturn potentially hurting demand for growth-dependent commodities, we have recently been reminded that prices are not only dictated by demand but also the availability of supply. The Bloomberg Softs subindex which tracks the total return performance of coffee, cocoa, sugar, and cotton reached a nine-year high last month, supported by adverse weather impacts on production, especially across the Southern Hemisphere where the impact of a returning El Niño is being felt, in the process driving down available stocks. Arabica coffee jumped 13% last month in response to a decline in exchange-monitored warehouse stocks to the lowest level since 1999, partly driven by a rule change banning the resubmission of old coffee beans.

Another important development during the past month has been the Panama government’s decision to shut First Quantum Minerals Ltd.’s Cobra operation which produces about 1.5% of the world’s supply of copper, the so-called king of green metals, given its importance for a successful energy transition. In recent updates, we have been highlighting the risk of copper demand exceeding supply in the coming years, 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.

The Panama government’s intervention that followed weeks of protest after the company had been given a multi-decade operating contract, has now led to the closure of one of the world’s biggest and newest mining operations and Panama’s second biggest employer, and it highlights the increased risk miners may face in the coming years. Peru is the world’s second-largest copper producer after Chile, and its mining industry is also struggling to find a balance amid rising political uncertainty and the probability of anti-mining protests disrupting mine operations.

Copper rose 5% last month, at first supported by speculation the Federal Reserve’s aggressive rate hike cycle has reached the end of the road, before supply worries gave the price an additional lift. 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 from Goldman showing a 10% year-on-year increase so far this year, with green transformation industries continuing to increase demand.

A situation highlighted by a drop in Chinese 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.

Responding to these developments, the HG copper futures contract has reached an 11-week high at $3.88 per pound, in the process breaking back above the 200-day moving average. Our structural long-term bullish view on copper has only been strengthened by these developments – and without a resolution, the global copper market is likely to see a deficit emerge already next year, potentially forcing prices higher sooner than expected.

Commodity articles:

• 30 Nov 2023: Precious metals take top spot for a second month
• 23 Nov 2023: A nervous crude oil market awaits OPEC's next move
• 23 Nov 2023: Podcast: Will Santa deliver another golden gift
• 22 Nov 2023: Will gold and silver see another Santa rally?
• 16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
• 16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
• 15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
• 12 Nov 2023: Copper supported by green transformation demand, China stimulus and peak rate speculation 

Previous "Commodity Weekly" articles

• 17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
• 10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside

• 20 Nov 2023: COT: Crude selling slows, grains in demand
• 14 Nov 2023: COT: Crude long slumps; agriculture sector in demand