- Last week, saw copper prices extend their downward trend with prices falling to $5,477 per tonne before finding support.
- We said recently that the trend since the February high remains bearish so this rebound may simply be a counter-trend move. With another rebound under way we wait to see if prices break out of the downward trend. To do that, prices would need to initially climb above the DTL at $5,792 per tonne and then overcome the recent peak at $5,820.
- This latest rebound has stalled again, so it was perhaps another counter-trend move.
- The stochastics had turned bullish, but they too have now turned lower again.
- The long-term chart (inset) indicates that this year’s rally has not yet travelled far and there is considerable room for it to go further. So we remain quietly bullish for the medium- and longer-term outlooks but as we have said in recent weeks we remain open minded about the short term.
The rapid inflow of copper stocks into LME sheds had appeared to run its course, but yesterday stock release showed another large landing of 19,075 tonnes, so more of the same may be seen. Today’s stock data showed 4,125 tonnes of inflow. It seems as though yesterday’s large pick-up has zapped what bullish sentiment there was in the market.
In addition, the retreat in equity markets yesterday and political uncertainty in the USA has led to some risk-off across markets, with safe-haven buying noted, as seen by the rebound in gold prices, the yen and US treasuries.
The rebound seen over the past five days does seem to have prompted some short-covering, the cash/three-month spread has narrowed to $19.50-15.50 per tonne contango, having widened to $33.25c on May 3. This short-covering may well have been done by those who had recently been shorting the market.
The funds trading Comex were doubly bearish in the week ended May 9, with the NLFP dropping 8,081 contracts, from 18,538 a week earlier. This was, however, after the previous rebound attempt failed. See today’s COTR report. Money managers trading on the LME had also been increasing short exposure, so there was potential for short-covering there too. That said, with prices looking vulnerable again, short-covering may ease to a short step to the sidelines.
A week ago, there was one large holder of nearby metal holding 30-39% of the warrants. Yesterday’s LME data showed the large warrant holder remained, but one entity also held tom and cash positions equivalent to 50-79% of the size of the warrant position. As such, the market could tighten up again. The three-months date today is August 18, and the August to three-month spread is in a $2.30-2.50 per tonne backwardation. Given a lot of short-selling is believed to have been done in recent months, the spreads could tighten up significantly when these shorts are either rolled forward or closed out – that is if metal is not delivered against the shorts.
One of our long term reasons for being bullish is our belief that China is committed to its One Belt, One Road projects which is not just bullish for China, but for the region in general. These are massive projects that will take time to plan, finance and build, but it is difficult to not see them as being resource-hungry. As such, President Xi Jinping’s commitment to the project with another $124 billion pledge over the weekend, suggests infrastructure spending in the region will underpin demand for metals. However, this type of news is long term bullish and not necessarily bullish for the short term.
This current bout of weakness, we think has been brought about by more hoarded metal being attracted into the supply chain by the high prices between November and February. Once this extra supply has been absorbed/consumed, we expect the tighter underlying and future fundamentals to be bullish drivers.
Copper prices have undergone a correction; prices had run ahead of the fundamentals and the higher prices had led to a temporary increase in supply. It is now a case of letting the long liquidation run its course, but we think these lower prices will prompt some restocking. We remain medium-to-long-term bullish, but the market does not seem in any hurry to restock yet, as such we would wait for a more bullish picture to emerge.