- Copper moved to a low in June before rebounding - prices are now above their key daily moving averages, which are upward-slopping, suggesting that they could provide support in case of renewed weakness in prices.
- Taking a broader look, however, a (bearish) reversal pattern can be identified this year, namely a double top. The first top was in March and the second in April. Should this pattern prove valid, we could see further downside toward the 2016 low after the current positive retracement peters out.
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On the upside, copper's challenge is to move above the psychological $5,000 mark to produce a meaningful change in trend. On the downside, a return below the 20 DMA could produce a negative swing in sentiment and induce further selling pressure toward the June low, a break of which would send the metal lower toward $4,500 as a first support.
Macro drivers
Copper has strengthened since Monday alongside the other base metals, partly supported by a rebound in risk appetite. The metal slipped lower after the Brexit shock despite a sizeable increase in risk aversion and a stronger dollar - this may be due to the presence of strong buying pressure, perhaps coming from the SRB to take advantage of lower prices.
The copper market seems to have been largely driven by speculative activity of late. According to LME statistics, money managers reduced significantly their net long positions in the first half of June before massively rebuilding through short-covering over June 17-24, a sign that the speculative positioning was overstretched on the short side. We think the short-covering rally will continue in the near term.
Uncertainty about the global economy has grown following the Brexit because political tensions could hurt business sentiment and economic conditions in Europe, which could spread to other parts of the world. This would undermine copper's fundamentals in the medium term but investors may overlook these negative effects in the near term.
A stabilising factor emerged in June: China's plan to lift its stockpiles of base metals, accelerate the closure of excess capacity and provide tax cuts for domestic producers to shift the domestic surplus to the rest of the world. Although no timetable has been specified, this plan has certainly helped boost sentiment.
The Chinese market remains tight, as the steep fall in SHFE stocks shows. At 155,235 tonnes as of June 24, they were down 6.5 percent week-on-week and down 61 percent from a high of 394,777 tonnes on March 18, which perhaps stems from the closed LME-SHFE arbitrage window. A tighter Chinese market should result in stronger SHFE prices and stronger LME prices.
But LME stocks rose 24 percent in June to 191,525 tonnes as of June 29 due to strong inflows from Chinese smelters in the first part of the month, which has easing the spreads. C/3s moved to an average contango of $7 in June from an average backwardation of $14 in May. The pattern is similar in the further-dated spreads. But the nearby spreads are vulnerable to tightness because outflows resumed in the second half of June.
A dominant holder of warrants at 30-39 percent has emerged since June 24. Assuming that the metal is held tightly, we would not be surprised by fresh tightness in nearby spreads in the days ahead of the July prompt date if the shorts are more concentrated than longs around the July contracts, which seems to be the case.
Investor focus will turn to Chinese manufacturing data for June on July 1 including the official and the private (Caixin) readings. This should shed light on the health of the Chinese economy. Since a stabilisation in the Chinese economy is foreseen, any negative surprise could prompt investors to reduce their long exposure to copper. Risks to prices are therefore skewed to the downside.
Latest statistics
- According to ICSG data, the global copper market posted 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. The supply/demand balance continues to move in the right direction, which suggests that numerous supply cuts announced last year have started to be felt. Sentiment should strengthen in the near term, we feel.
- Chinese imports of unwrought copper and copper products of 430,000 tonnes in May were down 4.4 percent month-on-month but up 18.6 percent from last year. The month-on-month fall could be due to the closed arbitrage window; we expect imports to increase once it reopens.
- Chinese refined copper production of 1.99 million tonnes in the first quarter of the year was up 8.5 percent on the corresponding period of 2015.