Article / 25 August 2016 at 12:14 GMT

Warning lights flashing for copper

Head of Commodity Strategy / Saxo Bank
  • Copper downturn could point to reassertion of demand woes
  • Declines partially offset by general strength in commodities
  • China cutting copper imports while exports remain on the rise

China has been cutting copper imports since March, but its domestic 
production now sits at a five-month high. Photo: iStock

By Ole Hansen

While investors spurred on by central banks experimenting with negative rates have been chasing equities higher and bond yields lower, developments in other sectors could indicate that all is not well. Copper, the old gauge for global growth and demand, is down on the year and now sits just above multi-year support. 

For the past year HG Copper has been mostly rangebound between $2/lb and $2.3/lb but following the latest weakness it is now once again down on the year. 

The reason why it is not trading lower is the general investment demand that commodities, especially precious and platinum group metals, have benefited from this year. Copper has also received some sector support from other industrial metals, most noticeable zinc (41%) and nickel (12%). 

These gains have so far left the Bloomberg Industrial metal sub-index up by 8% year-to-date. 

Slowing Chinese imports, surging exports

China, the worlds biggest producer and consumer of refined copper, has been cutting imports continuously since hitting a record back in March. In July it fell to 251,235 tonnes, the lowest level seen since February 2015. 

While imports have slowed domestic production has risen to a five-month high of 722,000 tonnes. The excess supply generated has increasingly been hitting the global market with China having raised exports more than five-fold during the past year. 

China refined copper import
Rising inventories

Stocks of copper in LME-approved warehouses have risen by 25% during the past week. Most of the 53,000-tonne build has occurred in South Korea and Singapore. 

This rise has led to speculation that China is exporting its surplus production into the global market. This is similar to what we are currently witnessing in the energy sector, where China increasingly has been crowding out the Asian product market by raising exports.

Copper inventories

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Rising production
While Chile – the world's largest producer – has kept production steady, we have seen rising production from several countries. According to this article, production in Peru has surged by more than 50% during the first six month while Canada and Mexico are also mentioned as countries where mining companies have added capacity.

In one of its latest updates, Goldman Sachs has warned that a "supply storm" is about to hit the copper market during the coming months. This has led the bank to conclude that copper is at risk of a 10-15% selloff which could see LME Copper trade below $4000/tonne and HG copper below $1.70/lb.

What are hedge funds doing?

The managed money or speculative position shows the positions held by major hedge funds in US HG copper futures. After building a record short on June 14, the subsequent bounce triggered a collapse in the short base. During the week ending August 16, the net-position returned to flat which has basically left hedge funds with plenty of ammunition should a clearer direction emerge.

Speculative positioning in HG Copper
What are the charts telling us?

Copper has been rangebound for the past year with HG Copper having settled into a $2-2.3/lb. range. With the rising LME inventories these past couple of days, copper has come under some renewed pressure but so far it is holding above key support levels.

HG Copper
Source: SaxoTraderGO 

Taking a broader vantage, we find a price which is getting very close to key multi-year support. A trendline going all the way back to 2002 is currently providing support around $2/lb. A weekly close below this level could trigger a major technical reaction with the initial target being $1.8/lb.

HG Copper, first month cont.
Source: SaxoTraderGO 

Saxo Bank chief economist Steen Jakobsen earlier this week put out a note in which he raised the likelihood of seeing the dollar rallying through this cycle where the market is lagging behind in its adjustment to a Fed desperate to normalise. 

A stronger dollar could be the near-term driver which finally creates a reaction in markets that have increasingly been going stale, one of these being copper.

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank


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