Weak Fundamentals for Copper Prices
Copper prices are subdued at best compared to oil and gold, which have managed to hold on to their recent gains. Indeed, Brent oil futures exceeded $40.00 per barrel for the first time since last November. Rumors of a scheduled April 17 meeting between Saudi Arabia and Russia to discuss capping current production have excited the oil bulls. But copper prices remain substantially flat amid seasonally low demand and there are few prospects for any significant gains in the short term.
Still, it’s not all bad news for copper. The metal is still trading higher compared to an all-time low price of $1.94 per pound set last January 10. After a bullish March, when copper started to recover, it found resistance at $2.28. Since April 3, the copper price has found some stability, hovering in a $2.00–$2.16 range.
The risk is that any bearish episode after this period of relative stability could trigger a sharp sell-off. J.P. Morgan Cazenove warned spot copper prices carry a further 33% downside risk due to slowing growth in demand from China and a rise in oversupply. Ever more intensely, copper prices depend on what China does. As mentioned, Chinese demand is slowing and this has prompted copper producers to take cover. (Source: “FTSE tumbles after copper sinks to one-month low on demand concerns,” The Telegraph, April 7, 2016.)
Chart courtesy of www.StockCharts.com
Even as the copper price has found some stability over the past week, there are bearish indicators putting negative pressure on the metal. The U.S. Federal Reserve has held back on raising interest rates. This has managed to rein in the dollar, stopping it from breaking away compared to other currencies. However, given the typical inverse relationship between the dollar and commodities—the higher the dollar, the lower commodities—it might be best for copper investors to consider cashing in on their gains from the recent rally.
Some commodity analysts and producers had expected higher copper demand from China. Yet this has not happened, nor is there a strong chance of it happening in the short or medium term.
Copper prices will drop further still because of a surge in extraction prompted in hopes of a demand surge from China that failed to materialize. The reasons for slowing Chinese demand are not clear, but some speculate that either China has a large buildup of copper inventory or that end users who enjoy the low prices are looking for some short-term gains. (Source: “Editorial: What happened to the copper rally?” The Northern Miner, April 12, 2016.)
In fact, while there has been a perception of a rally, brief as it was, this may well have been a mere speculative episode, lacking any economic foundation. (Source: “Oil, copper at risk of 25% slump on ‘rush for the exits,’ Barclays warns,” MarketWatch, March 30, 2016.)
If anything, the bearish pressure is building momentum. There is a chance of an actual copper price collapse, should commodity investors choose to cut their losses and sell copper holdings, fueling a sell-off. This may be harsh for many investors, because commodities showed such promise of recovery at the start of this year. Even as copper prices have managed to find a safe spot thanks to a higher-than-expected rise in Chinese exports last March, the overall trend for copper is bearish. (Source: “Daily Shot: China’s exports expand at fastest pace in a year,” Tradingfloor.com, April 13, 2016.)