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LME copper price heading back towards pre-pandemic levels

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New York — The London Metal Exchange copper contract has been closing in on prices not seen since pre-pandemic trade, as participants continued to take cues from the wider market, alongside decent fundamentals, with Chinese equity markets putting in the best daily performance in five-years.

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The bulls have been firmly in control of copper trade in recent weeks, with the price graph showing a very solid V-shaped recovery, at the same time as global economies offer no such optimism.

Copper, often cited as a bellwether for the world's fiscal position, could be well off the mark though, oscillating in its own universe.

A lot of the bullishness comes from a variety of global fiscal packages aimed at shoring up countries hammered by the coronavirus pandemic.

"Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US non-farm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus. Shanghai shares jumped 5.7%, the best one-day gain in five years. It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia," Neil Wilson, an analyst at Markets.com, said.

Broker SP Angel agreed, saying many investors were positioning for recovery, adding that another rationale behind copper's continued move higher was signs the London Metal Exchange inventory data continued to show possible outflows.

LME data showed global copper stocks have fallen 8,525 mt to total 197,850 mt. Canceled warrants, or metal possibly ear-marked for delivery, stood at 91,750 mt on July 6.

However, looking at the year-to-date data on a graph, throughout 2020 metal has dropped, than re-entered the system, possibly highlighting uncertainty over actual demand or simply reallocation of metal dependent on trading strategies.

The LME three-months copper price was trading marginally above $6,100/mt as of 1220 GMT, having started 2020 at $6,188.5/mt. The metal hit a year-to-date high of $6,343/mt in January and a low of $4,371/mt in March.

Traders cautious

However, traders were less enthralled.

"Just because inventory data is dropping, it does not mean metal is getting consumed. It could just be being reallocated. The copper story has, in my view, gotten ahead of itself. For sure there's a bullish rhetoric, but this stampede higher is not sustainable," one senior metals trader said.

ANZ pointed out that although unprecedented stimulus from global governments has helped prop up economies, "leaders around the world are facing issues around when to wean businesses and individuals off the support delivered to offset the financial impacts of the pandemic."

Indeed, many sources were concerned what the legacy of mounting central government debt will do further down the line.

Indigo Ellis, senior analyst and head of Africa research, at Verisk Maplecroft, said the sheer volume of fiscal stimulus raised alarm bells of deeper issues further out, as sovereign debt balloons. "Across the world debt issuance is astonishing," Ellis said.

On the matter of copper, ING told clients in a recent note that the metal has seen a "stellar V-shaped rally, paring almost all of the losses since the outbreak of the pandemic. LME prices have extended above $6,000/mt, further boosted by supply worries from Chile."

Chile's copper mines produced 495,604 mt of copper in May, up 0.6% year on year, government data showed June 30, as the industry worked to maintain normal levels of output amid the coronavirus pandemic.

Chile 2020 output lower

Mines in Chile, which produce more than a quarter of the world's copper supply, have continued to operate during the pandemic as the government has declared the sector essential. To reduce the risk of infection, companies have halted non-essential activities, including exploration and development, allowing them to reduce the number of workers onsite by around 30%, and implemented sanitary measures.

The government has estimated that these actions will reduce Chile's copper production by 200,000 mt this year, from 5.787 million mt in 2019.

ING put the run higher down to a clutch of factors:

  • Unprecedented monetary easing and government fiscal stimulus
  • The tailwind from a weaker dollar, with the downward trend expected to continue
  • Supply disruptions across the value chain from mine to smelting as well as scrap supply
  • More importantly, apparent demand from the world's largest consumer China has made a strong recovery

"This has been backed by pent-up demand following the easing of lockdowns and has dovetailed with the traditionally strong demand season," the Dutch bank added.

Looking at the demand side of the story, Canada's TD Securities pointed out that the copper recovery continued to "confound skeptics" who say the rally has outpaced demand.

"However, we see no signs of speculative froth in positioning data on the LME, COMEX and SHFE. While a large decline in speculative short positioning may have helped kick-start the recovery, short positioning has remained [stable] for several weeks, while the low participation from the longs mitigates the risk that money manager behavior has contributed to higher prices," Bart Melek, head of commodity strategy at TD Securities said.

The Shanghai Future Exchange's copper price hit a six-month high last week, supported by economic data and concerns of tight copper ore supply.

prices are likely to hover at high levels in the short term, with inventories set to stay at relatively low levels despite the market entering a seasonal lull and the copper ore supply tightness, market sources said.