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Copper fundamentals fly out the window over trade jitters

Economic fallout fears linked to the U.S.-China trade war continue to drive copper price weakness, commodities experts said, as the market worries about a potential hit to demand for the red metal, which is used in a slew of products from cars to electric cable.

Since mid-April, high-grade copper prices have fallen from over US$6,500 per tonne on the London Metal Exchange to close to US$5,600/t in recent trading.

"All the weakness you're seeing in copper and oil, and other commodities other than precious metals, reflect market issues, not necessarily fundamentals in those markets," CPM Group Managing Partner Jeffrey Christian said.

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U.S. President Donald Trump has said the U.S. will raise tariffs on US$250 billion in Chinese goods from 25% to 30% starting Oct. 1 and from 10% to 15% on U$300 billion in other Chinese imports starting Sept. 1. The move came in response to China's plans to put 5% to 10% tariffs on US$75 billion of U.S. goods amid a prolonged trade war between the two countries.

China is a heavyweight copper buyer, gobbling up about half of global copper output, much of which is produced in South America.

The economic malaise, or potential for it to increase, has driven some analysts to pull back copper price expectations for 2019 and 2020. In a recent copper report, S&P Global Market Intelligence revised its 2019 copper price forecast for the LME cash contract price from US$6,176/t to US$5,976/t.

"This reflects a prolonged shift in global economic sentiment, which will keep copper prices under significant pressure through 2020," S&P Global Market Intelligence analyst Keval Dhokia said in the Aug. 16 report. "We have therefore also downwardly revised our 2020 price expectation to US$6,033/t."

Taking a look at copper's recent price decline, Dhokia noted a "strong relationship between the short positioning of investment funds and key milestones reached in the U.S.-China trade dispute."

Otherwise the copper market looks to be fairly balanced, analysts said, with S&P Global Market Intelligence forecasting a near even supply and demand balance this year and in 2020.

While copper prices haven fallen significantly in recent months, Paradigm Capital analyst David Davidson said in an email that he was surprised at copper's resilience in recent weeks given trade issues, hefty short positioning by copper speculators and a build-up in LME inventories.

"If the trade dispute is not resolved or at least contained in the short term, a recession, or a significant global slowdown, is in the cards, and copper and other risk assets have only one way to go — lower," Davidson said. "Fundamentals really don't matter in this uncertain economic environment."

Should U.S.-China trading relations normalize and the economic outlook clear, Davidson expects investors to flock back to copper.

"Investors will begin to realize the supply side picture looks very constructive and this should lead to higher prices, likely initiated by a short squeeze," Davidson said. "We have seen what a short squeeze was able to do for the nickel price in recent weeks — frankly, a perfectly balanced binary outcome."

Trading under US$12,000/t as recently as June, nickel prices climbed through July and briefly breached US$16,000/t earlier in August.

Meanwhile, amid the trade war, China's yuan has weakened against the dollar, adding pressure on industrial materials, analysts have noted. "Although the move is small in absolute terms, it is meaningful in terms of messaging and sentiment," BMO Capital Markets analyst Colin Hamilton said in an Aug. 6 note. "A depreciating renminbi is bad for industrial metals, but net positive for precious investor flows."

In the second quarter, copper miners also pointed to trade tensions as driving lower prices and, in part, shrinking profits.

If lower copper prices persist, miners could cut higher-cost output. "We are now trading at levels where you may see some copper supply removed from the market," Hamilton said in an email. However, he expects copper prices to at least partly recover in the fourth quarter. "Though this will need greater evidence of a copper-intensive China stimulus to turn things around."