Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Copper and copper mining stocks continue to push higher with the futures prices in New York and London reaching levels last traded in June 2022. For the past two years, Dr. Copper aka the King of Green Metals has traded mostly sideways, navigating relatively unscathed through rough seas created by sharply higher funding costs as central banks around the world hiked interest rates to combat inflation, and not least a slowdown in China, the world’s top consumer of copper.
During the past couple of months, the metal has steadily climbed, buoyed by global growth and demand optimism, and material downgrades to 2024 mine supply increasingly tightening market conditions. Several mining companies have announced production downgrades due to factors like increased input costs, declining ore grades, rising regulatory expenses, and weather-related disruptions.
A jump in China’s exchange-monitored warehouse stocks to a four-year high would under normal circumstances be considered as market negative, but given the current economic challenges in China, some of the increase has potentially been triggered by traders hoarding liquid traded metals like gold and copper in anticipation of further yuan weakness.
Furthermore, the ongoing green transformation and increased use of AI applications are augmenting demand from traditional sectors like housing and construction, and together with the green transformation, we maintain our long-standing bullish stance on copper, and with copper miners also exhibiting signs of resurgence, the possibility of a fresh record high in the second half of the year appears achievable.
The above chart shows the year-to-date performances of two (out of several) exchange-traded products which track the performance of physical copper and mining companies involved with the production of copper. The COPX ETF shown tracks the performance of 38 mining companies, with the top four representing around 24% of the total exposure. They are Ivanhoe Mines Ltd (IVN:xtse), Antofagasta (ANTO:xlon), Lundin Mining Corp (LUN:xtse), and Southern Copper Corp (SCCO:xnys). Link: How to add copper exposure to your portfolio.
At the CRU World Copper Conference 2024, held in Santiago, Chile, this week, Trafigura’s CEO Jeremy Weir said, that in order to fill a potential supply gap of 8 million tons by 2034, mining companies need prices that are higher than USD 10,000 a ton (USD 4.54 a pound) and possibly as high as USD 12,000 (USD 5.44 a pound). Even the more conservative forecasters see demand growing by a third over the next decade, as governments and businesses step up investments in decarbonization. And therein lies the challenge with Bloomberg Intelligence estimating that over the past several years, the time from so-called first discovery to first metal has lengthened by an average of four years, to 14 with miners complaining that mountains of red tape are choking developments.
Having rallied to reach the January 2023 high at USD 9550 a ton in London and USD 4.355 a pound in New York, the short-term outlook may point to consolidation, but so far the strong dollar and weak economic data from China this week has not deterred traders and investors, with the technical outlook raising the prospect of an extension towards USD 4.75 a pound in New York and USD 10,500 in London. Having been quite slow to respond to the rally, hedge funds went on an aggressive buying spree in the week to April 9, more than doubling their net long High Grade futures position to 50.7k contracts, highest since October 2021. During the week in question, the volume weighted average price (VWAP) for the HGN4 contract was USD 4.31 and break below may potentially leave the market exposed to a small setback as long positions are being scaled back, potentially creating a fresh buying opportunity for others.
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Previous "Commitment of Traders" articles
15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge