Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Traders are betting on a tighter copper market in coming months, as disappointment over China’s stumbling economic growth is overtaken by fears of a squeeze on global supplies.
Copper — a key barometer of global economic health given its use in everything from buildings to power lines — for delivery in June is $8,832 per tonne, $105 more expensive than the spot price. The difference between current and future delivery is the largest ever, in records that go back to 1994, according to Bloomberg data.
Analysts say that the hefty gap reflects the ample supply at present and fears the situation could change rapidly.
Traders have downgraded their expectations in demand from China for the red metal, after Beijing’s stimulus measures earlier this month fell short of expectations. “The actual recovery in [consumer] demand is not as strong as expected,” said Zhang Jiefu, senior analyst at Wuhan-based Zhengxin Futures. “Purchasing is very cautious at the moment.”
Macquarie estimates Chinese copper demand growth will slow this year to 3.9 per cent, down from 6.7 per cent last year.
Rising interest rates are another key factor behind the difference in price for copper since higher financing costs associated with storing metal physically for traders encourages a move towards longer-dated commodity futures.
But many traders are placing bets on supply shortages as production cuts by miners begin to take effect. Macquarie has revised down its copper supply forecast by 1mn tonnes for 2024 since last September.
Lower production is likely to have a lagged ripple effect through the supply chain. Many copper smelters, which refine the raw material into metal, have become lossmaking as there are too many facilities fighting over a tight supply of raw material. Traders are betting some will have to slow or halt production, tightening supply of refined metal and translating into higher prices in coming months.
Goldman Sachs has predicted that copper prices will hit $10,000 per tonne by the year-end on robust Chinese demand and the “ongoing supply-side shock”.
Chinese copper smelters are working on a joint plan to cut output to cope with the raw material shortage. News of the rare move earlier this month sent the benchmark copper price soaring above $9,000 per tonne.
The volatile rally was further fuelled by speculative trading by hedge funds and others, which built net long positions on the expectation of a tighter market.
Daniel Hynes, senior commodities strategist at ANZ Research in Sydney, said the spot market was not yet feeling the impact of the tightness in supply of concentrate because of plentiful stocks that were built up ahead of China’s annual meeting of its rubber stamp parliament this March.
The market had been expecting more stimulus measures from the meeting, which sets economic targets, so producers had been stocking up for stronger growth. Now they are backing off on that.
“Clearly, the expectations around Chinese growth are also being reset,” Hynes said. “That’s delayed that potential restocking that we would normally see continue through into the second quarter,” he said.
But some say the supply shortages are likely to rear their head soon as the smelters start to make production cuts and falling interest rates lifts demand in China and other parts of the world.
“Elevated mine supply disruptions point to a deficit of 700,000 tonnes, and should start to feed through to refined production too,” said Morgan Stanley in a note, predicting a $10,200 per tonne copper price by the third quarter.
Read the full article here
