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Copper gains luster as trade tensions ease

Copper looks set to shine through the first half of 2020 as global trade tensions ease on the back of a tentative "phase-one" deal between the U.S. and China and manufacturing demand shows modest signs of improvement, some analysts said.

"Tactically, we see an opportunity to add a little more commodity price risk into H1 2020, as trade rhetoric looks towards resolution rather than conflict, and the key industrial developed markets of Europe and East Asia stop getting worse," BMO Capital Markets analyst Colin Hamilton said in a Dec. 17 note.

The price of copper has rallied in December, climbing about 5.2% to US$6,145.25/t as of Dec. 18, with some analysts pointing to improving conditions in global manufacturing and potential investor interest for base metals as supporting the price in 2020.

"Base metals are likely to come back into favor with macro asset allocators as growth concerns fade, which should benefit copper," Hamilton said.

In November, global manufacturing data pointed to expansion for the first time since April, according to survey data from J.P. Morgan and IHS Markit. But in December there were also signs of weakness, with Moody's forecasting a negative outlook for the sector.

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"Copper is rising due to increased fabrication demand and relaxation of fears of recession," CPM Group Managing Partner Jeffrey Christian told S&P Global Market Intelligence. He described the phase-one deal between the U.S. and China as having little direct impact on the copper market.

Meanwhile, amid copper's December rally, Hamilton noted that there were also signs of weakness in the market, with copper's physical cathode premium falling to a six-month low in China. However, he said December weakness is not unusual.

"The big test for underlying demand will come in the post-Chinese New Year period and we do feel there is a good chance that many metal prices will be trading ahead of underlying fundamentals over the next two months helped by financial market positioning," Hamilton said.

RBC Capital Markets analyst Tyler Broda also saw short-term support for the price of copper, citing tight inventories and stabilizing global manufacturing. "We think copper recovers into early 2020," Broda said in a Dec. 2 note.

But Broda said that in the longer term, he expects new copper supply to weigh on the market, noting that RBC Capital Markets recently lowered its 2021-2023 copper price forecast to US$2.75 per pound from US$3.00/lb.

S&P Global Market Intelligence has forecast the price of copper to climb from US$6,033/t in 2020 to US$6,225/t in 2021. It also projected a global refined copper deficit of 7,000 tonnes in 2020 and 73,000 tonnes in 2021.