Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Oct 2015.
Below is the Copper report, to read 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 – Demand factors in the driving seat
Copper prices continue to work lower within quite a well-defined down channel and there looks to be little in the way of chart support to stop them from falling further. Despite numerous supply disruptions and some high-profile talk of production cuts that look set to reduce the forecast supply surplus, these are still likely to weigh on prices given weak demand. Low oil prices and declining commodity currencies are helping to lower production costs, enabling some producers to delay making cuts. But others have stepped up to the plate and are reducing output. Earlier in the year we had $4,500 per tonne as our production cost pivot; this is probably now closer to $4,200.
Overall trend – Copper prices continue to oscillate lower within the wide down channel. Recent lows have avoided falling back to longer term trend support but the series of lower highs and lows remains in place. The low for the year so far has been $4,855 per tonne; the long-term support line connecting the 2002 low with the 2008 low is at $4,335, which is where we would look for support in the long term. Demand concerns, especially weak demand in China, and short selling are driving the market weakness – numerous supply disruptions, cuts and talk of future cuts have provided only short-lived support and have not been enough to turn the tide. International Copper Study Group (ICSG) data for June showed that the copper market was almost balanced in the first half of 2015, with a 19,000-tonne surplus. This leaves little room for further supply disruptions, which look likely to stem from low prices or from adverse weather conditions brought about by an El Niño weather pattern that looks significantly stronger than usual. We are not bullish for copper per se but we would not be surprised by some more short-covering due to a more balanced market given the extent of supply disruptions. What copper really needs to turn sentiment less bearish, or even bullish, is for some better economic news out of China but that may be a long shot. With supply surpluses likely next year too, the overall outlook calls for weak prices.
Slower growth, not contraction – The slowdown in China, yuan depreciation and the fallout from this in emerging market (EM) economies has put more downward pressure on commodity prices; copper being no exception. To what extent the weakness is caused by the fundamentals and how much by falling investor/consumer confidence is less clear. It seems likely that poor PMI data, yuan depreciation and the EM fallout, as their currency weakness attests, have all reduced confidence in the global economic outlook. Fundamentally, China is the world’s second-largest economy; even if it were growing at, say, five percent instead of around the seven percent that official data suggests, it still needs a lot more of everything in tonnage terms. According to International Copper Study Group (ICSG) data, global copper usage fell two percent in the first half, with Chinese usage dropping around one percent. Since the global and Chinese economies are still growing, the apparent drop in copper usage suggests considerable destocking. While this is not surprising given falling prices, destocking can only last so long and it leads to a leaner supply chain. Before long, we expect the combination of the end to destocking and low prices to lead to an upward swing in apparent copper demand; prices are likely to rebound before stabilising.
Stocks trends show copper flowing to China again – Although sentiment around copper is depressed, some of the data from the LME suggests the market is not that bearish. LME stocks are falling – they were last at 323,975 tonnes, down from a recent peak of 371,250 tonnes – and cancelled warrants have climbed to 52,650 tonnes, with metal being drawn down across a wide range of locations in both big and small parcels. The latter suggests restocking. The LME/Shanghai copper arbitrage window has been open a great deal recently and imports into China, especially concentrate imports, have picked up. The spreads paint a mixed picture: the forwards have tightened significantly, with the 3-15 month spread flipping into a small backwardation as of early September, which suggests improved selling interest, while the cash-to-threes spread has been backwardated since mid-August, suggesting tightness. In addition, one entity holds 40-49 percent of the warrants, ‘tom’ and cash positions, which suggests the fund shorts may well struggle when they come to take profits and cover their shorts. So the internal market data does not look as bearish as prices and sentiment would have us believe, at least for the near term, but it looks more bearish further out.
Forecast – Production disruptions may well steady the market for a while but prolonged surpluses and sluggish EMs may well keep prices under pressure well into 2016. Expect a fourth quarter range of $4,850-5,450.
The run-up in LME stocks has stopped for now and they appear to have started to trend lower again. Cancelled warrants are climbing but at around 50,000 tonnes it looks as though stocks will fall further, although further bouts of tightness in the c-3s spread could alter that.
The forward curve has flattened since July, with 3, 15 and 27 months backwardated compared with cash, while 63 and 123 months are in small contangos. This suggests that lower prices have attracted forward selling.
The funds trading Comex went net short at the start of June, but the position has shrunk to net short 4,041 contracts from a peak of 33,759 contracts in mid-August. The main change of late has been driven by short-covering.
Money managers on the LME have turned net long again after a brief period of being net short. The gross long position recently dipped to its lowest all year but it has started to climb again. The gross short position is in mid-range.