Macro and micro drivers
LME copper is marginally weaker at the start of the week while the broad-based consolidation across the base metals continues despite the injection of liquidity by the Chinese central bank over the weekend.
The forward curve of the LME copper market has tightened remarkably – the cash/three-month spread has averaged a small contango of $1 per tonne, compared with an average contango of $32 per tonne so far this year. While this suggests strengthening appetite for copper consumption, this may undermine carry-demand buying, a key support to copper prices.
The People's Bank of China (PBoC) announced a 0.5pp cut in the Required Reserve Ratio (RRR), effective July 5, following a similar cut implanted on April 17 (the first RRR cut since 2016). The latest RRR cut is set to inject 700 billion yuan ($107 billion) of fresh liquidity, which was more than the market had expected. This moves comes amid growing fears over trade tensions between China and the United States and a resulting sell-off in Chinese risk assets. Yet, domestic risk taking appetite has continued to weaken since the start of the trading week, with the CSI 300 Index down a little bit more than 1% as we type. Accordingly, investors are refraining from rebuilding long positions in copper and other industrial metals.
Although China’s activities (industrial production, retail sales, fixed asset investment) softened at a stronger pace than expected in May, the property sector (accounting for 33% of domestic copper demand) continued to improve, with land sales, property sales, new housing starts, and property investment all producing positive surprises. This is therefore supportive of copper demand.
The concentrate market has become less tight since the start of the second quarter. Metal Bulletin’s copper concentrates treatment and refining charge (TC/RC) index shot up to $77 per tonne /7.7 cents per lb in the middle of June, its highest level since January. The main catalyst has been the forced shutdown of Sterlite’s 400,000-tpy Tuticorin smelter in Tamil Nadu, southern India since late May after 14 protesters against planned expansions were killed by police. TC/RCs may continue to go up in the near term because Glencore’s Pasar copper smelter (330,000 tpy) is set to undergo repairs to its sulfuric acid cooling plants, reducing its operating capacity.
This week, the economic calendar is rather quiet so investors are likely to focus on the trade relations between the US and its largest trading partners. A tit-for-tat escalation is already under way, which could have material implications for global economic growth and therefore for copper prices. Separately, the re-election of Recep Tayyip Erdogan as Turkish president seems to have elicited a boost in the Turkish lira and equities so far this week. A return to calm in the emerging market (EM) world is conducive to a stronger copper price environment.
Flows in visible inventories
Exchange inventories are up on the year, suggesting that the fundamentals of the copper market have not tightened meaningfully yet.
LME stocks - at 305,525 tonnes as of June 22 - are down by ~12,000 tonnes or 4% so far in June (including an increase of 11,250 tonnes last week) after they fell 7,575 tonnes or 2% in May. They are up around 105,000 tonnes or 53% in the year to date after falling by about 112,000 tonnes, or 38%, last year.
SHFE stocks - at 255,394 tonnes as of June 22 - are down ~13,000 tonnes or 5% so far in June (including an increase of 2,377 tonnes this week) after they rose 22,522 tonnes, or 9%, in May. They are up by around 105,000 tonnes or 70%, for the year to date after dropping by nearly 4,000 tonnes, or 3%, in 2017.
The International Copper Study Group (ICSG) estimates the global refined copper market was in a surplus (for a fourth month in a row) of 55,000 tonnes in March, bringing the surplus to 153,000 tonnes in the first three months of 2018, compared a deficit of 84,000 tonnes in the corresponding period of last year.
According to the ICSG, refined production rose 3% year on year in the first quarter of 2018, while refined demand grew 1.8%.
Metal Bulletin Research (MBR) projects a surplus of 150,000 tonnes in the first quarter of 2018, with refined production and refined consumption up 1.8% year on year. For 2018, MBR expects the global refined copper market to register a deficit of 169,000 tonnes.
We have a bullish outlook on copper. Similarly to other industrial metals, copper has consolidated sharply since the middle of June due to an escalation in trade tensions and worrying economic data out of China.
While a bit more pain in the copper price cannot be ruled out in the immediate term, we expect the Chinese (and the global) economy to prove resilient because a full-blown trade war remains unlikely. The global copper market should remain in a deficit this year, thereby prompting investors to religiously buy the dips.
We have a hypothetical long position in copper that we initiated at the start of 2017. We decided to tighten our stop-loss to $6,500 per tonne from $6,000 per tonne to maintain a favorable reward-to-risk ratio. We expect a break above the 2017 high this year.
All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.