Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, April 2016.
Below is the copper report, to download a PDF copy of the full report covering all the metals in pdf form click here.
Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.
Copper – Is China’s economy starting to recover?
The freefall in copper prices has halted – there has been a delayed reaction to a build-up of bullish factors. The market had become too complacent about the bearish China trade and the rebound since mid-January caught many in the market wrong-footed. A counter-trend move is now in progress; given the low level of LME stocks and rising prices, a period of restocking may ensue. US funds have been busy covering shorts but that trend may now wane, while money managers on the LME have been getting longer, which may lead to profit-taking. We expect prices in the second quarter to consolidate and build a higher base above $4,700 per tonne. Although there are still proxy short positions, which are also vulnerable to shortcovering, the twin effects of which are likely to keep the price rangebound We expect prices in the second quarter to consolidate and build a higher base above $4,700 per tonne with selling pressure should prices approach $5200.
Overall trend – Copper prices have enjoyed a significant counter-trend rally in which they have peaked at $5,131, a rebound of 18.8 percent. This is almost enough to trigger a bull market. On the monthly chart above, the rally looks as though it could go a lot further – the downtrend line is around $5,700 – but perhaps not just yet.
On balance we thought the weakness late last year and early in January was an overshoot on the downside caused by traders and funds looking to short commodities to hedge against weakness in China. Sentiment was so negative that it led to the market ignoring the supply responses that had started and that were added to in January when China’s SRB agreed to initiate a stockpiling programme and major Chinese smelters agreed to cut 350,000 tonnes of production. Once prices stopped falling in mid-January, it was only natural that the market started to rebound even when bearish news prevailed. In turn, this set off a chain reaction of short-covering, restocking and CTA-type fund buying. These factors have driven the rebound even though the fundamental outlook has not improved much, with the global manufacturing PMI showing stagnation – it fell to 50 in February from 50.9 in January. But more recent data looks more promising.
Tightness returns as China soaks up spare metal – The oversold state of the market around the end of the year that triggered a response by China in the form of production cuts and stockpiling also led to general restocking and covering of shorts. In turn, LME stocks accelerated lower and the nearby copper spreads tightened. The cash-to-threes spread moved into backwardation in mid-January, peaking at $32.50 in mid-March, while LME stocks dropped to 143,400 tonnes at the end of March from 235,800 tonnes at the end of 2015. The metal seems to have been shipped to Shanghai. The LME/Shanghai copper arbitrage window was open for most of January and February; stocks in SHFE-registered warehouses have climbed to 360,925 tonnes from 177,854 tonnes at the end of 2015. LME stocks have fallen 92,400 tonnes and SHFE stocks have climbed 183,071 tonnes – not only has LME metal shifted to China but surplus metal and metal from custom-bonded warehouses in China also appears to have made its way to the SHFE. The 143,400 tonnes of LME stocks, of which 113,475 tonnes are available (i.e. not cancelled), do not provide much of a cushion against supply shortages or disruptions. It again seems that China has taken advantage of multi-year low prices to build up strategic stockpiles; this seems an astute move given the country’s structural deficit of refined copper.
Copper market to remain in a small deficit – The copper market was in a supply deficit of 57,000-167,000 tonnes in 2015, according to the International Copper Study Group (ICSG), the latter figure taking into account changes to Chinese bonded stocks. In 2016, with output cuts partially offset by new production, the ICSG expects mine output to rise 1.5 percent to 19.4 million tonnes and refined production to rise 1.6 percent to 22.9 million tonnes. Again, we feel the production cuts will stay in force and we expect output growth of just one percent, taking into account supply disruptions. The ICSG forecasts only a 0.5-percent rise in copper demand to 23 million tonnes but we feel this is too pessimistic given that China accounts for 45 percent of global copper consumption and the country’s GDP growth is expected at around 6.5 percent – such a growth rate in such a large economy seems certain to see global copper demand rise more than 0.5 percent. Our forecast is for demand growth of two percent, which would take consumption to 23.34 million tonnes and mean a deficit of 170,000 tonnes.
Return of investment interest – Although commodity markets have generally been very weak in recent years, prompting many investors to leave commodities out of their portfolios, we sense a change unfolding this year. Oil prices, base metals and precious metals have all been rising at times, which we think could stem from some institutional investors slowly buying back into commodity baskets to take advantage of washed-out prices.
Outlook – We said in our January report we expected prices to reach a low in the first quarter and then to recover. They have done so; we would now expect prices to range-trade above $4,700 while the market waits for better news on the economic front. We expect a second-quarter price range of $4,700-5,200 per tonne.
With LME stocks falling back towards the lows, there is not much of a cushion against supply deficits and disruptions. Cancelled warrants are also low.
The forward curve in mid-January when prices were at the lows was flat. The run-up in prices has seen it become slightly more backwardated, suggesting some forward selling.
The funds trading Comex turned net long for one week late in March and have since turned net short again – is the rally over?
The net long money managers’ position on the LME has dropped on long liquidation and short selling – is the rally over?
Download the full report here.