Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Jan 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 – Will supply cuts turn the market round?
Copper prices continue to fall; the downward trend has accelerated. Many of the metals have been shorted by Chinese funds, which have bet on the deterioration in China’s economy – being unable to short equities, funds are shorting what they can. Producer cuts are now being seen, which have added to the other supply disruptions and which should help balance supply and demand. But the weak demand outlook for emerging markets (EMs) has hijacked sentiment, which is what investors are looking at. While output cuts may be able to turn the market round – we think they will – it would be a lot easier if the outlook for demand recovered, which we think will happen later in 2016. In the meantime bearing in mind the Chinese New Year we expect prices to languish for the time being, supported around $4,200 but recovering towards $5,000 later.
Overall trend – Copper continues to sell off, with prices setting a low so far of $4,350 per tonne – some $500 below where the low had been at the time of the October report. Copper prices have now retraced 79 percent of the 2008-2011 super-charged rally and are well below the high ground of around $8,000 of the super-cycle in the years preceding the 2008-2009 financial crisis. Before the super-cycle, $3,000 was considered to be a high price for copper (see chart above); the low seen during the financial crisis was $2,825. The long-term support line connecting lows in 2002 and the 2008 spike low is now around $4,400 so the recent price weakness has breached that support area. With the downward trend dominating, it is difficult to say where prices will find support. If the situation in China deteriorates and threatens to cause widespread contagion, prices could spike lower still. But some 600,000 tonnes of production cuts have already being made and more are likely if prices continue to fall. On balance, we would say the copper market is already close to being balanced although sentiment remains washed out – aggressive short-selling, especially in China, is likely to have been responsible for that. If more cuts are made, the supply side of the market may be able to turn the market round on its own. It is not as if metal has stopped being consumed, so if a real shortage is orchestrated and stocks start to fall, prices will rebound. Once that happens, short-covering is likely – those who have used copper as a means to get short-exposure on China will have to find another proxy.
Not all signs are bearish – Given the price performance, one could be forgiven for thinking everything looks bearish but this is not the case. LME stocks are falling and are not that high – they were last around 236,000 tonnes, admittedly higher than they were at the start of 2015 at 178,425 tonnes but down from the late-August 2015 peak of 371,250 tones. With the spread often backwardated and rarely in much of a contango, we do not think much metal is being financed off-market. Perhaps the most bullish aspect of market data is in treatment and refining charges (TC/RCs), which are falling. Average global TC/RCs for clean standard-grade copper concentrates have dropped to $89-99 per tonne/8.9-9.9 cents per pound from a high in November of $110/11 cents. This reflects several issues: mining cuts are reducing concentrate supply while low prices and a positive arbitrage market are encouraging Chinese smelters to buy, which also suggests their stockpiles of concentrate have been drawn down. If concentrate tightness is starting to be felt, it may not be too long before it affects refined metal supply and then physical premiums.
Slower growth environment – The market is concerned about the slowdown in China and the impact this will have on EMs. With equities under pressure and currencies weakening, a weaker China does not bode well for household spending and demand for housing, autos, white goods and electronics, which puts the focus back on state spending/stimulus. This is perhaps the one area that is surprising the market the most. In recent years, when China has shown signs of weakness, the authorities have stepped in with stimulus. This time, there has been some stimulus but Beijing seems intent on sticking to structural changes; these are taking time to come about, certainly much longer than the market has patience for. There has been a lot of talk about the massive ‘One Belt, One Road’ projects, but little sign of order flow. With the countries involved in these projects all in need of economic growth, we imagine their governments will be pushing things forward so the pick-up in the order flow will follow. Generally, we believe China is in control of its economic transition and that growth will follow. Since the economy is now likely to have destocked heavily given the price weakness in recent years, there is a real danger that the markets have become too bearish on demand and could be caught off-guard should destocking end and restocking start. Even a return to hand-to-mouth buying could see apparent demand recover; restocking could then fuel that.
Forecast – Prices look set to fall further but we expect them to reach a low in the first quarter and then to recover. The potential for short-covering and restocking could mean a sharp initial recovery. We expect a first quarter price range of $4,200-5,100 per tonne.
The post-Qingdao run-up in LME stocks petered out in August; LME stocks have since resumed their fall although there is still some inflow too. Cancelled warrants are low.
The forward curve has switched from being backwardated at the higher prices to being in contango now prices are lower, suggesting some forward buying interest.
The funds trading Comex are net short and the gross short position is high while the gross long position is average.
Money managers on the LME have reduced their exposure to copper, especially the longs. The funds are quite polarised.