London 06/07/2016 - The copper market is far from stable and, despite the recent price rises, participants should brace for more volatility because it has yet to find a bottom, Barclays Commodities said in a note.
LME three-month copper was last at $4,733 per tonne, having rallied earlier this week to two-month highs of $4,960. Although down around $175 from this week's peak, prices are still up some six percent from a monthly low of $4,496 on June 10 prior to the UK referendum.
"In the aftermath of Britain's vote to exit the EU, copper has rallied, potentially leading to the false belief that all is well with copper. However, China data released last week, as well as technical indicators specific to China’s copper market, show that the opposite is true," the bank warned.
The Caixin manufacturing PMI at 48.6 missed the expected 49.1, which the bank said signalled that China's recent public infrastructure and real estate investment momentum is unlikely to be sustained.
And while copper closed the second quarter of this year averaging $4,736, a quarter-on-quarter gain of 1.2 percent, it was still down 21.8 percent year-on-year. This time last year, the red metal was trading at $5,746.
Barclays retained its call for prices to average $4,300 in the coming quarter, believing the market will again focus on weakness on China's economy, leading to further downward pressure on prices.
"The danger for the copper market remains interpreting the strong second-quarter action within China as a reversal of the longer trend of slowing demand growth," it said.
In the third quarter the bank expects momentum to stall in China - the stimulating effects of loosened credit, concentrate stock-building by smelters and favourable arbitrage circumstances are set to dissipate.
Consequently, it does not believe the bottom has been seen and said the third quarter may not be as kind.
As well, stock levels have started to increase on both the LME and the SHFE. LME stocks now stand at 222,550 tonnes, the highest since February 10, while the SHFE reversed a recent trend of declining inventories and last week posted a 4.3 percent week-on-week increase to 161,894 tonnes.
"Since March, the continued decline in SHFE copper inventories has been a bullish sign for the markets, as it was evidence of a reasonable level of demand… If inventories reverse the recent trend and start to build, this will have a bearish effect on global markets," Barclays said.
(Editing by Mark Shaw)