Copper’s physical market is showing some of its most bullish signals in years, with premiums, scrap discounts and trade flows all indicating heightened demand over supply.
Despite this, the London Metal Exchange three-month copper dropped sharply from a five-year high of $7,348 per tonne in June to a one-year low of $5,773 per tonne on Wednesday August 15.
Ultimately, fears that an escalation of trade tensions between the United States and China have the edge over the underlying physical market, analysts and market participants say.
“Fundamentals are actually okay overall, it’s more the concern about trade that is driving the market at the moment,” Bank of America Merrill Lynch metals strategist Michael Widmer said by phone on Monday.
Premiums highest since 2016
Metal Bulletin’s grade A copper cathode premium cif Shanghai rose to a 21-month peak of $69-88 per tonne on Tuesday, having averaged $72 per tonne in the year to date.
This marks a 28.5% hike on the same period last year, when Metal Bulletin assessments averaged $56 per tonne. The year average for 2017 was $60 per tonne, down slightly from $62 per tonne in 2016.
Quality scrap supply to China is also tight, exacerbated by a government push to reduce waste imports; with discounts at one-year lows of 26-28 cents per lb in June.
Meanwhile Chinese premiums for domestically produced copper cathodes hit their highest levels for the year last Monday.
“Premiums are steady, fabricator order books across the world of are strong and rising in China,” Simon Hunt, an independent consultant and copper market analyst said in a newsletter last Thursday, the day after a commodities complex rout saw copper futures drop by $243 per tonne.
Hunt sees power cable manufacturers in China currently running at full capacity and declining global stockpiles as prime reasons to be bullish.
“Our conclusion is that there will be no trade war… world synchronized growth will be alive and kicking in the further quarter, world consumption will continue to recover and prices will be heading towards $8,500 [per tonne] in 2019,” he said.
Now at $83.5 per tonne / 8.35 cents per lb, copper concentrate spot treatment and refining charges (TC/RCs) have been on the rise since May, when 400,000 tonne per year refined smelter Sterlite declared force majeure on contracts and was eventually shut down by the Indian government.
“We are generally seeing the concentrate market well-supplied with spot terms at, or slightly above, the current benchmark,” Darren Pylot, president and chief executive officer of Capstone Mining, said in an email to Metal Bulletin.
Benchmark terms for 2018 were set at four-year lows of $82.25/ 8.225 cents.
Meanwhile, strike-related supply hurdles in Chile are now out of the way and miners are optimistic that the coming years will be ones where smelter demand will begin to exceed supply; China’s imports of copper concentrates are up by 31% so far this year, according to customs statistics.
The International Copper Study Group forecast the copper market to move into a 330,000 tonne deficit by the end of 2019.
“Fundamentally, our very positive long-term view is unchanged and we are continuing to see robust demand that is expected to outpace new capacity,” Pylot, whose company expects to obtain 71,000 tonnes of copper from mines in Canada, the US and Mexico this year, said.
Macro in the driving seat
But while fundamentals may point to an improving supply/demand scenario, macro drivers remain the dominant force in the market.
“While prices may have undershot fundamentally-justified levels, we only see limited recovery potential and lowered our short-term price target. We shifted our view from bearish to neutral,” analysts from Swiss bank Julius Baer, who forecast an average price of $6,250 cash price for the rest of the year, said in a research note.
“The underlying issue is still one where the market is pricing in a more challenging macro moment particularly for China and trade, and that has never been good for copper,” Merrill Lynch’s Widmer said.
Prices could come down to $5,100 per tonne if tariffs start to have a negative effect on the global economy and bring growth down to 2016 levels, Widmer said. But the reverse scenario could see prices swing the other way.
“An agreement between the US and Nafta would weaken the dollar and help copper bounce up, one with China could mean you’d make up all of the losses we’ve seen over the last two months,” Widmer said.
Trade wars have not been good for copper bulls, they must now be hoping that they are easy to win.
In the battle between macro and fundamental copper price drivers, copper bears hold the strongest of all trump cards – trade war.