FOCUS - Copper unlikely to hit new lows, Q3 average seen at $4,600/t

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Vicky Chenvicky.chen@fastmarkets.comPhysicals Reporter+44 (0) 20 7337 2141

Shanghai 01/07/2016 - Copper prices on the London Metal Exchange (LME) is expected to fluctuate around $4,600 per tonne on average in the third quarter with the trading range likely to be at $4,300-5,000 per tonne, according to market participants surveyed by FastMarkets.

The LME, three-month copper price was last at $4,856 per tonne on Friday, up $11 from the previous day’s close and not far from its eight-week high.

Some think prices could hit the psychological $5,000-per-tonne in the near term as market sentiment have returned to risky assets along with the rebound of crude oil prices.

LME’s data showed that money managers have heavily slashed their net long positions in the first half of June before massively rebuilding through short-covering over June 17-24, and the short-covering rally is expected to continue in the near term, according to a FastMarkets copper research report on Thursday.

“The recent rally on oil prices would provide support for copper in the short-term. There will be limited room for miners to reduce their cash-costs, and I believe that the recent rally on copper prices will not be short-lived,” said a trader in Shanghai.

The increase in copper concentrate supply - due to the a series of mine ramp-ups and less production disruptions - could be overrated as the increase would partly offset the scrap supply shortfall in the market thus resulting in limited downside pressure on copper, he added.

On demand-supply fundamentals, the global copper market registered a surplus of 40,000 tonnes in March, lowering the year-to-date surplus to 42,000 tonnes, which compares with a surplus of 143,000 tonnes in the first quarter of 2015, according to ICSG data.

Also, the US dollar's upside is likely to be limited as market participants see the odds of another US Fed interest rate hike in the third quarter close to zero.

“The market is anticipating maybe just one Fed hike in December, especially after the shock of the UK voting to leave the European Union,” said a trader based in Asia. “The US dollar index will then have less room to climb which is supporting copper prices.”

But consumers and some traders have also expressed concerns on a slower growth rate and stricter financing environment in the third quarter.

A series of supply-side reform carried out by Beijing have seen many small companies either being bankrupt or merged with state-owned enterprises - a sign that the non-ferrous industry will become more concentrated.

“You hear copper cable manufacturers telling you a robust growth rate in the second quarter and the trend is likely to sustain. But the reason that they are performing well is because orders which are supposed to be in the hands of smaller factories are now directed to the big ones,” said a consumer source in China.

While the source maintained a bearish view on copper prices in the third quarter, he also reckoned that end-users would step up to buy when prices fall below $4,300.

It would also be hard for prices to fall under $4,300 despite tepid demand in the third quarter, he added.

Stock levels on the LME will also have a crucial impact - copper stocks have a stronger negative correlation with prices compared with other metals, sources saiid.

“The inverse correlation of price and stocks is quite evident for copper. Although LME copper stocks are up from 141,000 tonnes in early April, it has decreased almost 20 percent since the beginning of the year [to 191,525 tonnes on June 30]. Copper prices in the near-term would partly depend on the stock levels,” said a third industry source.

(Editing by Vivian Teo) 



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