Very short term (1M): Flat
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Up
R1 6,455 - 200 DMA
R2 7,500 - key level
S1 6,000 - key level
 S2  4,880 - major UTL

D/MMA – daily/monthly moving average
U/DTL – up/downtrend line
ADX – average directional index
RSI – relative strength index
LME - London Metal Exchange
SHFE - Shanghai Futures Exchange
ROW - Rest of the world
ICSG - International Copper Study Group

Technical drivers
Short term: The LME three-month copper price is on track to break back above its 20 DMA, which could produce a positive swing in sentiment. We see the next resistance at the 200 DMA.

Long term: Copper is still trending higher, moving above the major UTL and the 200 MMA. The next resistance is the 20 MMA, where a break could attract momentum-based buyers and push prices much higher still. 

Macro and micro drivers
LME three-month copper is up roughly 1% since the start of the week, making it the second-best performer after tin (+2%). The macro backdrop has turned friendlier this week, with a weaker dollar, a stronger oil price and a stronger risk-taking appetite thanks to improving US-China trade relations.

The backwardation in the LME's cash/three month spread has eased to $4.75 per from an average backwardation of $23 per tonne last week. Available stocks are consequently up 1,750 tonnes or 2%.

In spec positioning, investment funds cut their net spec length in LME copper significantly last week, the latest LME COTR shows. Since LME copper dropped only 0.8% over the period, our initial analysis suggests that fundamentals are strengthening, which is price-supportive.

China's imports of unwrought copper and copper product - at 456,000 tonnes in November - were down 3% year on year, the first yearly decline since December 2017. This could indicate that the tightness in the refined market stemming from tight scrap supply has eased in the final quarter because of slowing seasonal demand for refined copper. In the first 11 months of the year, China's imports of unwrought copper and copper product were still up 14.8% year on year. This comes in striking contrast to the decline of 4.7% year on year in the first 11 months of 2017 when scrap supply was still loose.

Today, investors will pay close attention to the ECB meeting at which the central bank is expected to formally end its quantitative easing (QE) program. This should be followed by dovish rhetoric to reassure the market that the ECB's policy stance will remain accommodative. This could be positive for copper prices.

Flows in exchange inventories

Global exchange inventories continued to drop last month, pointing to a tighter refined market:
  • LME stocks, at 119,975 tonnes as of December 12, are down around 14,000 tonnes or 11% so far this month (including a fall of 2,525 tonnes so far this week) after they declined by about 2,500 tonnes or 2% last month.
  • SHFE stocks at 123,879 tonnes as of December 7 are down around 7,000 tonnes or 5% so far this month after dropping by about 18,000 tonnes last month. 
  • Comex stocks at 120,512 tonnes as of December 6 are down 5,000 tonnes or 4% so far this month after they decreased by around 33,000 tonnes last month.
Supply/demand balance

The refined copper market was in a deficit of 31,300 tonnes in August after an upwardly revised deficit of 83,500 tonnes in July from 47,500 tonnes previously, the ICSG estimates. The deficit in August marks the fifth straight monthly deficit.

In the first eight months of 2018, the refined copper market was in a deficit of 259,000 tonnes compared with a deficit of 98,000 tonnes in the corresponding period in 2017.

In the first eight months of the year, global mine production rose 3.1% (including Chilean production: +8.2%), refined production rose 1% (China: +1.6%, rest of world: +0.6%) and apparent usage expanded by 2% (China: +4.7%, ROW: -0.6%) compared with the same period of 2018.

The fall in global exchange inventories since September suggests that the refined copper market has continued to tighten since then.

We expect copper prices to strengthen in the coming days based on the fact that we think that US-China trade relations will improve while the Fed will maintain its dovish tone to avoid removing too much convexity from equities after the recent sell-off. Against this, the macro environment should become increasingly friendlier for copper and the rest of its complex. We therefore expect copper prices to move higher by the end of the year and in the first quarter of 2019.

Trading positioning: We could open a hypothetical long position in LME copper if momentum improves again.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.