FOCUS - Copper to be volatile no matter whether UK stays or goes - Barclays

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Meimei Qinmeimei.qin@fastmarkets.com+442072642479

London 20/06/2016 - Copper faces a period of volatility around the UK's EU referendum regardless of the result of Thursday’s vote, Barclays said.

The UK will vote in a hotly contested referendum on June 23 whether it should leave or remain in the EU, which is "likely to predominate over fundamentals, meaning a week of volatility, no matter what the outcome", the bank said in a research note on Monday..

"In the event of a Remain vote, which is the baseline scenario for our current forecasts, we think copper could enjoy a brief spike in prices as a result of a broader move towards risk-on assets," it said.

But any relief rally would eventually fade, the bank suggested - the copper market would probably refocus on China's economic performance, which is showing signs of stalling.

Should the UK vote to leave the EU, though, a period of heightened market volatility could ensue, it added. The flight to the dollar and a move to security across asset portfolios could have a compound weakening effect on copper.

Over the longer term, the economic fallout would probably weigh on European copper consumption, the bank predicted.

"Our forecast of an estimated surplus of around 250,000 tonnes in 2016 would likely swell if volatility within markets spills over into the macroeconomy," it said.

But slowing refined output, a recovering cathode premium and declining inventories in China would provide some support.

First, Chinese output of refined copper has sagged so far this year, falling to 680,000 tonnes in May from 694,000 tonnes in April.

Second, China’s cathode premium has recently strengthened to around $50 per tonne after languishing at $40-45 for the past few weeks.

Third, SHFE inventories fell 16,233 tonnes or 8.9 percent week-on-week to 166,105 tonnes as of June 17, the sixth straight week of decline.

As well, China announced last week that it plans to increase its reserves of some non-ferrous metals - including copper - 'appropriately'.

Should any sell-off in the event of a 'Leave' decision become too severe, "SRB buying could also act as a support for global prices" the bank said.

Over the medium term, the bank retained its call for lower copper prices regardless of the outcome of the referendum, believing the action in China will be the primary driver of global copper prices.

"Our most recent review of China's downstream demand for copper looks worrying,” it said, forecasting a price drop to an average of $4,300 per tonne in the third quarter and $4,180 in the fourth quarter of 2016.

LME copper was last at $4,620 per tonne, up $68 on Friday's close.

(Editing by Mark Shaw)



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