Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – the latest are Sucden Financial Metals Reports for July 2016.
Below is the copper report. To download a PDF copy of the full report, please click here.
Subscribers have exclusive access to these reports before they are published through the research tab in FastMarkets Professional.
Copper – A balanced market
Copper prices are consolidating in low ground but the downward trend has halted for now – it is too early to say, however, whether this is merely another pause or whether a base is forming. The fact this consolidation is happening on the long-term UTL is constructive. But the trend line is just $350 per tonne below where prices are in early July. A pick-up in stock flow into LME-registered warehouses in recent weeks suggests no shortage of metal but, when total exchange stocks are viewed, the market looks tighter. Exchange stocks were last at 423,260 tonnes, down from 611,600 tonnes late in March. The downward trend in stocks may well underpin firmer prices. Resistance seen at $5,270, whilst good support at $4,750 should underpin the market.
Overall trend – Copper prices have traded in a range of $4,318 – $5,131 so far this year. This $813 range compares with a $2,040 range for the whole of 2015 and, with the low this year set in January and the high set in March, prices have been consolidating in the second quarter. There is a series of higher lows in place but no higher high yet; it would now take a move above the March high to suggest the downward trend may be over. The same pattern is evident on Shanghai prices but both LME and Shanghai prices have been trying to push higher since late-June so higher highs may be on the cards soon. It would take a move above 39,200 yuan per tonne to suggest an upside breakout. Our outlook is that a base is now in place. Strategic stockpiling by China and some macro fund buying, combined with an increased risk of supply disruptions as capital investments have been cut, are likely to underpin a gradual recovery in prices. While there is a danger that Brexit leads to slower European growth, we expect stronger growth in emerging markets (EMs) to counter any European slowdown.
Supply/demand outlook balance – Forecasts for the copper supply/demand balance this year vary from small surpluses to small deficits. Our own is for a 170,000-tonne deficit; the ICSG forecasts a 56,000-tonne deficit; some others have surpluses of between 150,000 tonnes and 300,000 tonnes. In a 21-million-tonne market, most of these supply/demand balances are plus or minus one percent of annual consumption, which given error factors suggest a balanced market. As well, with prices close to recent lows and after five years of a bear market that is bound to have led to significant destocking across the industry, the risk on the downside is likely to be limited while the potential for a recovery offers more opportunity. This might be a factor that investors start to latch on to – especially if China encourages and supports its metals industry to build up strategic stockpiles. Since China has a structural deficit in copper, this would make sense and would help the state diversify some of its dollar holdings.
Exchange stocks bullish overall – LME stocks may have risen in recent months, which could be potentially bearish for prices, but overall exchange stock moves must be taken in tandem to get a better picture. Exchange stocks, which stood at 464,250 tonnes at the start of the year, climbed to 611,600 tonnes at the end of March and were back at 423,259 tonnes at the end of June. The run-up in copper prices in the first quarter coincided with the climb in global exchange stocks but the flow was from the LME to Shanghai so it was seen as bullish; the reverse flow has been a dampener on prices even though total exchange stocks have fallen. Perhaps the bearish take of these flows is the fact that copper stocks have flowed out of China in volume when the flow is usually much more one-way. In the first five months of the year, refined copper exports from China totalled 160,000 tonnes, up from 105,000 tonnes in the same period in 2015.
Funds turn less bearish – Deleveraging by money managers trading LME copper and short selling by funds trading on Comex had been bearish aspects for the market until mid-June. Since then, fund short-covering on Comex has been aggressive but, despite higher prices, the fund longs have not yet got very engaged. Given low gross long fund positions on the LME and Comex, there is significant room for longs to increase their exposure should sentiment turn more bullish.
Forecast – Low copper prices, relatively low stocks and a destocked market suggest the downside is likely to be limited. With miners struggling with low prices, the effects of reduced capital spending are likely to catch up with the industry and we would expect more supply disruptions. The missing ingredient is a pick-up in demand – any sign of that in China would probably catch the copper market wrong-footed. For the third quarter, we expect prices to trade in a $4,750-5,270 range. In the first half of 2016, three-month copper prices have averaged $4,694; with prices in the second half expected to average around $5,000, we have lowered our average price for the year to $4,850 from $5,000.
Despite the rise in LME stocks, prices have managed to climb, or at least hold up in the high ground. The rise in stocks seems to reflect a shift in inventories more than an increase in supply.
When stocks dropped below 150,000 tonnes in April, the forward curve inverted into a backwardation. Recent stock increases have pushed it back into contango.
The funds trading Comex have been short but aggressive short-covering has been taking place. The market has yet to turn bullish, though, because longs have been liquidating too.
The net long money managers’ position on the LME is climbing again but the drive is coming more from short-covering than fresh buying. Will funds start to get long again?