There might never be a good time to buy copper.
The industrial metal, used in making everything from phone cables to power turbines, was one the first quarter’s stars, gaining 11% on talk that the world economy could have a better landing than thought this year .
Yet, instead of rallying further, copper prices might actually crash on dismay over the apparently inadequate stimulus for commodities accorded by China this year for its own recovery.
Just last year, copper finished 20% down for one of its worst annual losses ever.
Bank of America is among those with a new short position on the base metal now, and isn’t shy to talk about it.
According to the Wall Street bank, copper’s problem is in its overall supply-demand, not just the disappointing stimulus by top metals buyer China.
Copper Could Lose $300 Per Tonne Near-Term
Three-month copper futures on the London Metal Exchange hit a nine-month high above $6,544 a tonne on the first trading day of the second quarter this week, before retreating to around $6,460 in Wednesday’s trade.
On New York’s Comex, U.S. copper futures have struggled for months to breach the key $3 per lb resistance.
BoA said it initiated a LME short copper trade at $6,489 and anticipates the metal to lose as much as $300 in the near-term. Its rationale:
“Fading optimism in the near-term demand growth profile, along with a lack of discretionary interest, a rising hurdle rate for CTAs to hold onto their length, will all conspire to send prices lower over the coming months.”
“We see a favorable risk/return profile on the trade, placing a stop at $6610 and targeting prices as low as $6,150.”
Less Commodity-Intensive Chinese Stimulus A Worry
BoA cites less-commodity intensive Chinese stimulus than many market participants had hoped and positioned for, global slowdown concerns which have reduced risk appetite, and fewer supply disruption risks as the themes that would bring about $6,100 copper in the not too-distant future.
The Chinese stimulus measures, which included promises of infrastructure spending, were largely expected and come as economic growth is cooling, with Beijing targeting an expansion of 6-6.5% this year, down from 6.6% in 2018.
ING analyst Warren Patterson said for copper to really rally, China will have to move from talk to delivery on its stimulus pledges.
Says BoA:
“Considering that we think global markets are increasingly less likely to look past disappointing data, that the trend in growth is still not your friend and that we continue to expect global growth data to miss expectations, we think current prices offer an attractive risk-reward profile.
And, as supply disruptions fade, the curve should move into contango, working in favor of the shorts, with carry in their favor.”
Supply To Outstrip Demand By Next Year
U.K.-based CRU Group, a leading researcher on the global mining industry, says it expects annual copper mine supply to expand by 900,000 tonnes by the early 2020s.
It also forecasts that the shortfall of refined copper production versus demand would have shrunk from 600,000 tonnes a year ago to 200,000 by that time.
Vanessa Davidson, director of copper research and strategy at CRU, wrote in a commentary in the Financial Times on Friday that many of the world’s major miners believe copper has the most promising prospects of any major commodity.
She said this positive view was predicated on several geological realities associated with copper mining, such as declining ore grades and reserve depletion, alongside a series of encouraging demand trends. The consensus was that the copper market needed new mines and those able to develop them will benefit from increased volumes, revenue and profits.
More New Copper Mines Than Needed
But Davidson said such a consensus spawned its own debate on how many new copper mines are really needed.
“Over the past year there has been board approval for several high-profile expansions and new projects that are due on-stream over the next five years. The result is that the copper market looks considerably better supplied in the medium-term than it did a year ago.”
ING’s research showed that stockpiles of copper in Shanghai Futures Exchange (ShFE) warehouses had more than doubled to 227,049 tonnes in early March during a seasonal lull in manufacturing activity amid the Chinese winter and the Lunar New Year holidays.
As for demand, electric vehicles are a major talking point in the industry but they are unlikely to meaningfully impact global copper consumption until the second half of the 2020s. There are high hopes too on renewables, although these represent only a minor percentage of global energy production.
Similarly, India, long upheld as the next “China”, still uses way less copper than the world’s top metals importer—despite Indian imports of copper growing at a clip of nearly 10% per annum.
Said CRU’s Davidson:
“While a copper market deficit is still forecast for the early 2020s, albeit smaller in size than a year ago, recent experience suggests that this shortfall could disappear quickly if board approvals for new projects continue unchecked.”