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Copper price increasingly volatile, views on direction diverge

  • Author
  • Ben Kilbey
  • Editor
  • Felix Fernandez
  • Commodity
  • Oil Metals

New York — Copper is being driven by sentiment from other financial and commodities markets as much as its own fundamentals, increasing volatility and leading to divergent views on price direction.

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The London Metal Exchange cash copper price shed around 15% last month, finishing March at $4,797/mt after touching three-year lows of $4,371/mt mid-month. It started the year at $6,188.50/mt.

Earlier this month the metal broke above $5,000/mt and is currently trading above that level, around $5,100/mt as of 1400 GMT.

Speaking to S&P Global Platts this week LME CEO Matthew Chamberlain said that copper is currently been torn by a cut in production, as the world shutters shop to slow the coronavirus pandemic, and also a downturn in demand.

The world is looking at a fairly deep recession ahead, although it is unclear how long a pullback could last and how much damage it could inflict on the global economy.

Chamberlain said he expects things to be "tough" for industry as a whole in the face of a possible prolonged recession, but added that he remains steadfast in his belief that society has the "tools to get through it."

The latest crash in the oil market, which saw the front-month NYMEX WTI crude oil futures contract settling in negative territory for the first time ever, took some of the steam out of a recent run higher in global equities as well as the copper price, which was knocked down below $5,000/mt for a time on Tuesday. Copper has been taking some cues from global economic data and the performance of global stock markets, leading to increased volatility and price swings.

The Dow Jones Industrial Index opened higher Wednesday, giving a boost to the copper price.

On the physical side there has been some support on signs of China, the world's largest copper consumer, coming back online at the same time as a wave of global mine closures. "The biggest medium-term impact [from the pandemic] will be on global supply chains," said the LME CEO.

Physical volatility likely

Guy Wolf, global head of analytics at brokerage Marex Spectron, told Platts this week that physical markets could be very volatile throughout 2020.

"I think the risk of bottlenecks in various parts of the supply chain is very high. China has to import a lot of raw materials and there are capacity limits at ports which could cause shortages in concentrates for example. Supply chains are designed to be optimal within 'normal' ranges of activity. Rapid expansion of demand can be as problematic as rapid contraction for some parts of the industry," Wolf added.

The coronavirus pandemic has delayed copper concentrate shipments to China, which could affect copper smelting in the near term, Tongling Nonferrous said in its weekly copper report last week.

Tongling said copper mining in Peru and Chile was disrupted by the virus, and so were shipments. It said the resultant squeeze on concentrate supply is expected to impact copper smelting in mainland China over the next few months.

Wolf added that the key to copper demand has been, and continues to be, China.

"With China going back to work and further stimulus likely, we are bullish on copper prices," he added.

Price outlook mixed

Earlier this month Jeff Currie, global head of commodities research at Goldman Sachs, told S&P Global Platts that he was cautious of any copper rally and that the bank's view is there is likely to be another test of recent lows towards $4,000/mt.

He noted that copper is currently benefiting from the broader risk-on rally. "We are in a very, very, very bearish environment," he said.

Currie also noted that what we are currently seeing is different to the crash of 2008/2009, as that was a financial crisis, whereas this is a "real world" or physical crisis.

Back on more bullish footing, Thomas Rutland, copper analyst at S&P Global Market Intelligence, told Platts Wednesday: "Our base case assumption is that prices will recover during the second half of 2020. We expect that mine closures and the resumption, albeit gradual, of economic activity in China will mean that total exchange copper stocks will not increase. We assess that the mine closures and the restarting of economic activity in China to be the reason why copper prices have been held up and are starting to slowly increase again."

Still, for every bull there was a bear. Copper will likely head back towards $4,000/mt before finding a floor, ANZ bank earlier this month. The bank has a Q2 2020 average forecast of $4,500/mt, with the price around $5,000/mt for the remainder of the year.

MI is forecasting a 2020 average copper price of $5,850/mt, with a modest surplus of 22,000 mt.