Forecast:
Very short term (1M): Flat
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Up
Resistances:
R1 6,243 - 200 DMA
R2 7,500 - key level
Support:
S1 5,899 - 200 MMA
 S2  4,950 - major UTL
Legend:

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
COTR - Commitment of traders report


Technical drivers
Short term: The LME three-month copper price has rebounded off its 20 DMA, suggesting that sentiment is still positively skewed. If the 20 DMA gives way, though, the major significant support level is at the 200 DMA, which is still negatively sloping.

Long term: Copper is still trending higher in the very long term - it is trading above the major UTL and the 200 MMA. Still, monthly momentum is still negative despite the rebound since the start of the year.

Macro and micro drivers 
LME copper has made a positive start to the week, rising 0.5%. Risk sentiment is rebounding after a pause last week. Although Chinese credit data surprised to the downside in February, China customs showed that domestic exports rebounded by nearly 40% year on year in the first nine days of March after a 21% fall in February - the largest fall in three years. This eased concerns about a global slowdown.

Chinese copper consumption is subdued at the start of the year, as highlighted by:
  • Imports of unwrought copper and copper products of 790,000 tonnes in the first two months of the year were flat from the corresponding period of 2018. February imports dropped 12% year on year.
  • SHFE stocks have doubled since the start of the year, pointing to an oversupplied market.
  • The Shanghai physical premium is at its lowest since May 2017.
  • Our physical team reports muted downstream demand.
Still, we see some local tightness on the LME, evident in a forward curve that is in backwardation. Nearby spreads have been continuously backwardated since February 14. But the curve has eased somewhat - the backwardation in the cash/three month spread has moved into $11 per tonne from $70 per tonne on March 5. This was partly driven by last week's rise in availability - stocks climbed by 7,530 tonnes or 27%.

In copper's spec positioning, the latest CFTC data shows that copper's net long positioning by non-commercials is no longer light - the net spec length is at 12% of its open interest. Still, there is plenty of potential on the long side considering that the historical high of the net spec length was 44% of its open interest.


Flows in exchange inventories

Global exchange inventories are up on the quarter, pointing to a weaker fundamental picture (assuming no change in invisible inventories).
  • LME stocks, at 113,525 tonnes as of March 10, are down 18,650 tonnes/14% on the quarter (including a fall of around 13,000 tonnes so far in March and of 23,850 tonnes in February).
  • SHFE stocks, at 236,169 tonnes as of March 8, are up around 117,000 tonnes/99% so far this quarter (including an increase of 9,120 tonnes in the opening week of March and of 84,000 tonnes in February).
  • Comex stocks, at 50,059 tonnes as of March 7, have tumbled by roughly 50,000 tonnes/50% so far this quarter (including a fall of around 2,000 tonnes this week) after they dropped by around 91,000 tonnes/48% last year.
Supply/demand balance


The ICSG estimates that the refined copper market was in a deficit of 395,000 tonnes in the first 11 months of 2018, including a deficit of 52,000 tonnes in November.

Globally, mine production expanded by 2.4%, refined production grew by 1.6% and apparent usage increased by 2.1% on a yearly basis.

The Chinese refined copper market was in a deficit of 2.9 million tonnes in January-November 2018, with refined production up 3% and apparent usage up 5.5%.

Conclusion 
We expect the copper price to continue to push higher in the first half of this year. While the rally in copper prices since the start of the year is driven by stronger macro sentiment (despite weaker macro data) on global monetary policy easing, we think Chinese refined copper demand will strengthen in the coming weeks, resulting in tighter refined market conditions. This should give the copper rally fresh impetus. So we will closely monitor fluctuations in Chinese physical premiums and ex-SHFE price indicators (SHFE spreads, stocks etc).

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.