Copper prices have come under pressure on a stronger dollar, rising energy prices and the US-Israel war against Iran, according to analysts.
“Copper prices have come under pressure in recent weeks as macro headwinds combine with softer physical demand signals,” said ING Think, the economic and financial analysis wing of multinational financial services firm ING.
Besides the macro issues, rising inventories on exchanges, increasing refined output in China and weaker Chinese import demand suggest the tight market that supported prices in recent months may be starting to unwind, it said.
Shor-term downside pressue
According to Shanghai Metals Market (SMM), the macro transmission implies short-term downside pressure on copper prices.
“As the conflict drives oil prices higher, concerns about inflation and tighter monetary policy have increased, risk appetite has declined, and some speculative long positions have begun to unwind, putting pressure on copper prices,” it said.
Over the longer term, however, the copper market continues to face structural supply constraints, meaning that the current macro shock is more likely to manifest as sentiment-driven volatility rather than a fundamental reversal of the supply-demand trend, it said.
Stocks at record high
All these are indicators of copper heading south. The red metal, used widely in construction, wiring, transport, industry and electric vehicles, dropped below $13,000 a tonne to $12,997 on the London Metal Exchange (LME). In January, it soared to $14,500 a tonne ($6.61 a pound on COMEX, where is down to $5.81).
ING Think said copper inventories on Shanghai Futures Exchange recently hit a record high as physical demand softened in China. LME inventories are near a 17-month high.
“The inventory build also reflects strong inflows into LME warehouses, driven by shifting regional pricing incentives. As the COMEX-LME spread narrows, the incentive to redirect metal to the US is fading,” it said.
As pricing signals normalise, the metal is being redirected back into LME warehouses and other exchange stocks, ING Think said, adding that the direction of SHFE stocks will be important to watch. A decline in inventories would suggest Chinese demand is holding up at current price levels.
Stocks across the main exchanges have increased by over 500,000 tonnes since the start of this year. This is points to improving physical availability.
Easing supplies
“The scale of the inventory build suggests supply tightness is easing after a period of historically low visible stocks that helped underpin prices in recent months. If the pace of builds continues, it would reinforce the view that copper market tightness is beginning to unwind,” said ING Think.
SMM said developments in the Middle East may affect the copper market through another supply-chain channel: the indirect impact on the hydrometallurgical copper production system in Congo.
“A significant portion of DRC refined copper production relies on hydrometallurgical processes, which depend heavily on sulfuric acid supply,” it said.
The future trajectory of copper prices will depend on the duration of the conflict in the Persian Gulf, movements in oil prices, and changes in global financial conditions, while potential disruptions to African supply chains may emerge as another key variable for the market to watch, it said.
Record high March output?
ING Think said Chinese smelters have continued to increase production despite tight concentrate markets and the collapse in treatment charges.
Refined copper output is expected to rise to almost 1.2 million tonnes this month (March), according to a poll of producers by Shanghai Metals Markets, it said. “That would be a 4.6 per cent increase from February and a record high for the survey,” the ING arm said.
An increase in China’s domestic production has cut its reliance on imports of refined copper. With downstream demand softening, it could lead to a build-up in inventories.
“Combined with weaker import demand signals, higher smelter output points to additional supply filtering into the global market,” said ING Think.
Yangshan premium slips
As the COMEX‑LME spread has narrowed, the pull of the US market has weakened. This has resulted in more copper being available elsewhere.
This shift in trade flows could contribute to the recent build in exchange inventories and ease supply tightness outside the US, said the ING arm.
Pointing to the key indicator, the Yangshan premium declining significantly, it said this was due to weak import demand and reduced incentives to bring refined copper into China.
ING Think said it was maintaining its price forecast of a floor price of $10,000 a tonne for copper, though near-term headwinds are building.