Forecast:
Very short-term (1M): Flat
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Up
Resistances:
R1 6,000 -  Key level
R2 6,076 - 200 DMA
Support:
S1 5,732 - 2019 low
 S2  5,091 - 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
  • The LME three-month copper price is trying to break back above the 20 DMA, which could trigger a positive swing in sentiment if successful.
  • The 10-day momentum indicator is negative, which could lead to further momentum-based selling. 
  • Encouragingly, there is a divergence between the RSI (higher lows) and the LME copper price (lower lows) since June, suggesting that selling pressure may have been exhausted.
  • The bullish crossover pattern (20 DMA>50 DMA) could trigger some technical buying in the very near term.
  • Against this backdrop, we are inclined to believe that the 2019 low is behind us and that higher highs are likely from here. A firm break above the DTL from the 2019 high would boost our bullish conviction.

Macro and micro drivers 
LME copper has given up its early gains and was recently only up marginally from Friday's close. While the Caixin manufacturing PMI surprised to the upside, the official manufacturing PMI disappointed, which on net resulted in a risk-off environment in China. The Shanghai composite index is down while the yuan is weaker. But LME copper appears to be holding up well.

The tightness in the concentrate market has recently eased, which is evident in a slight rebound in spot TC/RCs after a sudden surge in availability of Grasberg concentrates - Freeport-McMoRan received extra export licenses from the Indonesian government earlier in September. This could boost refined output growth in the final quarter of 2019.

But refined copper consumption growth seems to have accelerated in recent months, especially in China. Signals from the Chinese physical market and inventory flows corroborate our view. We expect solid growth in Chinese copper demand in the final quarter of the year.

Copper's spec positioning turned shorter in the week to September 24 for the first time in three weeks. But the tight fundamentals of the copper market point to a significant unwinding of these short positions in Comex copper. According to our estimates, the LME three-month copper price could rebound by roughly 19% from here to $6,850 per tonne.

Supply/demand balance
The International Copper Study Group (ICSG) estimates that the refined copper market was in a deficit of 220,000 tonnes in the first half of 2019, larger than the deficit of 177,000 tonnes in the same period of 2018. In June, the refined market deficit totaled 21,000 tonnes, smaller than the 70,000-tonne deficit in May.

In the first half of the year, refined production and apparent refined usage both dropped by around 1% from a year ago.

The ICSG forecast a deficit of 189,000 tonnes for 2019 as a whole, while the International Wrought Copper Council (IWCC) expects a deficit of 312,000 tonnes this year.

Fastmarkets analysts expect a deficit of 224,000 tonnes for 2019.


Conclusion
Although the heightened macro uncertainty could keep spec positioning in copper stretched on the short side, we expect the fundamentals to tighten further in the final months of 2019, driven by a rebound in copper demand, especially in China. Since the macro negativity seems to have already been priced in, we believe that copper is vulnerable to short-covering rallies in the months ahead if the fundamental backdrop tightens as predicted.


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