LME copper plunged on July 11 to its lowest level since July 2017, at $6,081 per tonne.
Late in June, we cautioned that a monthly close below the 200 DMA would induce us to change our technical outlook to negative. This seems to have been the right call considering the huge sell-off so far this month.
While we maintain our negative technical outlook considering the negative momentum-based indicators, we firmly believe that the major uptrend in copper prices, which started in 2016, is not in danger. That said, copper prices could move still lower in the near term.
We see a first support level at $5,714 per tonne (200 MMA) and a second support at $4,845 per tonne (the major uptrend line since 2001).
Bottom line: we think that the three-month trend has changed from positive to negative.
Macro and micro drivers
LME copper is down another 1.5% since the start of the week (down around 8% in the month to date), which is mainly the result of lower demand expectations from China on escalating trade tensions with the United States, exacerbated by a firmer dollar that rallied after hawkish remarks by Federal Reserve chairman Jerome Powell yesterday.
While investor fears over the impact of trade sanctions on global economic growth make sense, we are inclined to think that investors are too pessimistic. So far, the health of the Chinese economy is not undermined. The latest raft of economic data (GDP, retail sales, trade balance) does not point to a meaningful slowdown in economic growth. Furthermore, the Chinese authorities stand ready to loosen their policies in case the cooling of the Chinese economy becomes more pronounced. If our positive scenario materializes, investors may be prompted to rebuild long positions meaningfully across the base metals complex, especially copper.
In the global concentrate market, Metal Bulletin's copper concentrates index jumped by $6.30/$0.63 to $86.10 per tonne / $0.861 per lb, the highest level since October 2017, suggesting less tight market conditions than traders expected, principally due to the lack of mining disruptions so far in 2018. Nevertheless, an imminent strike at Escondida could emerge following the failure to reach a labor agreement between union workers and the management. The current contract expires on July 24.
Looking at real-time micro indicators on the LME copper market, nearby spreads have switched back to a contango since the start of July, which is growing at a fast pace. The cash/three-month spread is presently at a $36 per tonne contango compared with an $11.50 per tonne contango a week ago. This suggests a weakening appetite for copper consumption, which is consistent with current price weakness.
Today, investors will scrutinize the second day of Jerome Powell’s testimony. Given his optimistic view toward the US economy, additional hawkish remarks could push the dollar higher and the copper price lower. Investors will also pay attention to the US Beige Book, which should give some anecdotal information about the consequences of trade taxes on the real economy. Trade developments will remain eagerly monitored.
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 303,100 tonnes as of June 25 - are down by around 15,000 tonnes or 5% so far in June (including a fall of 2,425 tonnes yesterday and an increase of 11,250 tonnes last week) after they fell 7,575 tonnes or 2% in May. They are up around 102,000 tonnes or 51% in the year to date after falling by about 112,000 tonnes or 38% last year.
SHFE stocks - at 234,696 tonnes as of July 13 - are down around 29,000 tonnes or 11% so far in July (including a fall of ~24,000 tonnes last week) after they fell moderately by ~4,000 tonnes or 2% in June. They are still up by around 84,000 tonnes or 56% in 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 with a deficit of 84,000 tonnes in the corresponding period of 2017.
Metal Bulletin Research 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, Metal Bulletin Research expects the global refined copper market to register a deficit of 169,000 tonnes.
Although we believe that the uptrend in the copper price is set to prevail in the coming months, further weakness cannot be ruled out in the coming weeks considering the wave of de-risking across the base metals space on intensifying trade tensions. Since the fundamentals of the copper market are set to remain tight this year, we expect some buying on the dips in the second half of the year.
Trading positioning: We closed our hypothetical long position in LME copper earlier this month at $6,500 per tonne, a position that we have held since the start of 2017. While we remain bullish on copper in the long term, we think that the price weakness is not over and more bulls are likely to capitulate before a new uptrend emerges.