The raised risk of supply disruptions from the world's two biggest copper mines has supported a renewed rally during January. Additional support has come from rising inflation data as well as the weaker dollar following the latest efforts by the White House to talk down the greenback.
A strike action at the Escondida mine in Chile could begin on Monday. Workers at this the world's biggest copper mine, run by BHP Billiton, voted for a strike action following the breakdown in wage negotiations.
In addition the world's second largest mine, Indonesia's Grasberg mine run by Freeport-McMoRan, has seen supplies being disrupted due to a current dispute between the owners and the government.
Indonesia wants to ban the exports of concentrate from its mines and instead only allow the export of refined products.
These developments, together with US president Trump's infrastructure pledge, have seen investment demand for industrial metals, not least copper, heat up during the past quarter.
Following more than a year of sideways trading, high-grade copper raced higher last November on a combination of Chinese demand and the potential of a major demand boost from Trump's infrastructure plan.
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Source: Saxo Bank
Back in December the market saw a reality check and gave back close to 50% of its November gains. Into January, however, the focus switched to the aforementioned supply worries and yesterday saw the price hit the highest level seen since June 2015.
The coming year could see increased strike action with close to 20% of global mine capacity facing contract renewals according to Citibank. In total this could disrupt about one million tons of output, or 5% of supply according to UBS.
Speculative demand for copper surged higher during November. Following a period of profit-taking during December, renewed buying was seen in the week ending January 24.
This took the net-long to a new record of 91,000 lots and a continued rise in the open interest of the futures contract since then does indicate that it has increased further during the past week.
The demand outlook for copper was, even considering the potential for increased US demand, struggling to justify the price surge last year. Inventories registered by the three major exchanges in New York, London and Shanghai have been rising steadily since December and currently stands at a nine-month high. But with the focus (at least in the short term) switching to supply concerns, the metal could see further upside if disruptions begin to impact supply.
For now, though, HG Copper needs a clear break above $2.74/lb to target the 2015 high at $2.95 while LME copper has so far found resistance at $6,000/MT, a major psychological level. Funds holding a record long position are unlikely to worry to much about corrections unless we see breaks below $2.63/lb. and more importantly $2.58/lb.
Silver has been enjoying the tailwind provided by the rally among industrial metals. Yesterday it broke previous resistance at $17.32/oz, thereby retracing half of the "Trump dump".
The next level of resistance can be found at $17.73/oz which is the 61.8% retracement of the post US election selloff and also 38.2% of the July-to-December selloff.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank