Strong USD, China demand worries send copper to 4-month lows

Copper futures prices decline in September on USD pressure, weak China demand

On September 29, three-month copper futures traded on the London Metals Exchange (LME) rebounded 1.2% to trade at $8,313 a metric ton.

Metal prices have largely been mixed in September, with copper down 1.5% — its lowest levels since the end of May. The decline persisted due to several factors, including the sustained strength of the U.S. dollar (USDX) and a global lack of confidence in industrial prospects. Despite intermittent improvements in industrial growth and new lending activity in China, ongoing concerns regarding the financial stability of property developers in the country continued to cast doubt on the overall macroeconomic situation.

"With the US dollar remaining strong, we see little scope for a strong rise in metal prices in the coming months, given their historical inverse relationship with the greenback," analysts at BMI wrote in a note made available to the Wall Street Journal.

As recently noted by MarketWatch, the drop in copper prices within the spot market has widened the gap between the spot price and the futures price traded on the London Metals Exchange for delivery three months in the future. This spread is now at its broadest level since 1994 — a condition that has placed the copper futures curve into a state known as "extreme contango”, a term used by commodity futures traders when futures prices are trading in excess of the spot price.

The decline in prices has been occurring over the past few months due to the jump in stockpiles at London Metals Exchange (LME) warehouses worldwide.

Analysts attribute this decrease in demand largely to the economic weaknesses observed in China. Given that China is the world's second-largest economy, the repercussions of this downturn could have far-reaching effects, extending to regions such as Europe, the United States, and beyond.

Based on the most recent data from the LME, as of September 22, there are 163,900 tonnes of copper stockpiled in exchange warehouses across the globe. This represents a 50% surge since the beginning of September, which itself followed a 50% increase observed during the month of August. Data indicates that these inventories have been on the rise since mid-July.

Commodity analysts point out that the implication of this situation is quite clear.

“This shows clear signals of weakening demand,” said Ewa Manthey, a London-based commodity strategist at ING, in a note to clients. To be sure, Manthey noted that inventories remain low by historical standards.

Dave Rosenberg, formerly an economist at Merrill Lynch and now the head of Rosenberg Research, attributed the decline in copper prices to the deteriorating economic situation in China. Additionally, he pointed out that prices might be responding to a decrease in global trade.

In August, global trade experienced a 3.2% year-over-year decline, marking the most significant drop since August 2020, as indicated by the latest data from the World Trade Monitor, a publication by the Netherlands Bureau for Economic Policy Analysis.

The prospect of a more hawkish Federal Reserve and growing apprehensions about economic growth in Europe have also maintained downward pressure on industrial activities. This was evident in the months of consecutive contractions seen in manufacturing PMIs.

However, copper futures managed to avoid further declines as market participants pointed to significant upcoming copper deficits. Current production levels have struggled to keep pace with rising demand for electrification. Output from Chilean state-owned Codelco also experienced a substantial 14% drop in the first half of the year, compounding the 7% decline observed in 2022.

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Copper futures forecasts: Analysts relatively bullish on the commodity

Despite the downturn, some analysts are highly bullish on the commodity, such as Citibank’s Max Layton, who said the commodity could trade at $15,000 by 2025.

He recommended investors slowly begin buying copper over the next 12 months, arguing that China’s eventual economic recovery and the energy transition will lead prices to surge to $15,000 per metric ton over the next three years. “Expected returns are a massive 50% to 100% by 2025,” he said of this “bull case” scenario.

Nonetheless, Citi has also presented a pessimistic scenario in a July report, in which copper prices might decline by 10% to $7,500 by 2025. In this turn of events, China's economic rebound would be slower and less robust than initially anticipated, while the effect of high interest rates in the United States and Europe could have a “larger than anticipated impact” on global growth, resulting in reduced copper demand.

Strategists at Melbourne-based ANZ bank were more reserved in their copper forecast than Citi, but their projection concerned a shorter time span:

When considering copper futures for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.