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Analysis: Copper under pressure, has potential to fall further

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Analysis: Copper under pressure, has potential to fall further

London — Copper, often seen as a barometer for the overall health of the global economy, has been feeling the pinch in the face of an increasingly gloomy outlook.

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The red metal has been hit hard by lackluster industrial indicators and, with the trade war between China and the US spiraling, there seems to be little on the horizon to offer near-term support.

Bank of America/Merrill Lynch -- which told clients previously that three conditions needed to be met for a rally in copper: a weaker dollar, stronger Chinese data, and the de-escalation of the trade dispute, said in a recent note: "Unfortunately, none of these have materialized and, as a result, copper has been under pressure. To that point, global averagePMIs would justify prices 30% below current levels, i.e. at $4,400/mt".

London Metal Exchange three-months copper was spot bid around $5,760/mt Monday, down from a year-to-date high of $6,608.5/mt back in April. The contract started 2019 at $5,970/mt, hitting an intraday year-to-date low of $5,640/mt on August 5.

Citi bank analyst Max Layton said that should there be no near-term resolution in the China-US tit-for-tat, the copper price "could easily trade down to $5,500/mt, or potentially lower".

One senior copper trader said: "Let us also not forget LME stock levels are high, around 275,000 mt, and this is also weighing on sentiment. Take a look at the scrap market, discounts have increased on the back of slack demand and plentiful supply. It is all getting pretty messy out there."

LME warehouse data Monday showed total copper stocks weighed in at 273,350 mt. They hit a high of 302,975 mt in early July and a low of 111,775 mt in March.

"Global manufacturing PMIs [are] pointing to a contracting sector, along with the uncertainty associated with additional tariffs all continue to [highlight] headwinds for industrial demand looking forward...CTAs remain short across the complex," Canada's TD Securities said.

On the physical market, a combination of uncertainty and slower summer demand prompted some consumers to sell off excess inventory and adjust their demand expectations in the US copper cathode market.

"We might be a seller over the next few months. We have to see where the market is heading," one consumer said, referringto nervousness in the market over the China-US trade tensions and the recent slump in equities markets.

On the subject of global trade tensions, China's commodity importers have been changing tack after last week's yuan weakening. Last week China pegged the yuan above 7 to the dollar for the first time in a decade. The Trump administration said the move, the latest in a long line from both sides, was "currency manipulation".

Keval Dhokia, commodities analyst at Market Intelligence, part of the S&P Global family of businesses, told S&P Global Platts: "With the probability of prolonged trade restrictions rising, China has allowed its currency to breach the long-defended 7 level against the dollar as of August 5 for the first time since 2008."

"LME copper cash prices were expected to return above $6,000/mt for the remainder of 2019, but last week's raising of tariffs has reduced the prospects of this substantially," Dhokia said.

Still, there was some positive spin for copper this week, further out, as consultancy Wood Mackenzie said that as electric-vehicle penetration increases, so will demand for copper.

Over 20 million EV charging points were expected to be deployed globally by 2030, consuming over 250% more copper than in2019, according to Wood Mac.

Henry Salisbury, Wood Mackenzie research analyst, said: "Copper is a cornerstone of the EV revolution. At the heart of the electric vehicle, it is used throughout because of its high electrical conductivity, durability and malleability. The need for copper is even more significant when it comes to charging stations and supporting electrical grid infrastructure."

By 2040, Wood Mac predicted that passenger EVs will consume more than 3.7 million mt of copper every year. In comparison,passenger internal combustion engine vehicles will need just over one million mt.

-- Ben Kilbey, ben.kilbey@spglobal.com

-- Edited by Daniel Lalor, daniel.lalor@spglobal.com