Home Commodities Traders are betting that reduced supply will drive up copper prices

Traders are betting that reduced supply will drive up copper prices

by SuperiorInvest

Unlock Editor's Digest for free

Traders are betting on a tighter copper market in the coming months, as disappointment over China's faltering economic growth is overtaken by fears of a squeeze on global supplies.

Copper, a key barometer of global economic health given its use in everything from buildings to power lines, for June delivery costs $8,832 per ton, $105 more expensive than the spot price. The difference between current and future delivery is the largest ever recorded, in records dating back to 1994, according to Bloomberg data.

Analysts say the sizeable gap reflects the current ample supply and fear the situation could change quickly.

Traders have lowered their expectations for China's demand for the red metal, after Beijing's stimulus measures earlier this month fell short of expectations. “The real recovery in [consumer] demand is not as strong as expected,” said Zhang Jiefu, senior analyst at Wuhan-based Zhengxin Futures. “Buying is very cautious right now.”

Macquarie estimates Chinese copper demand growth will slow this year to 3.9 percent, down from 6.7 percent last year.

Rising interest rates are another key factor behind the copper price gap, as higher financing costs associated with physically storing the metal for traders encourage a move toward longer-term commodity futures.

Line chart of LME spot price vs. 3-month LME price showing copper entering deepest contango in over two decades

But many traders are betting on tight supply as production cuts by miners begin to take effect. Macquarie has revised down its copper supply forecast by 1 million tonnes by 2024 since last September.

Lower production is likely to have a delayed ripple effect throughout the supply chain. Many copper smelters, which refine raw material into metal, have become loss-making as there are too many facilities fighting for a limited supply of raw material. Traders are betting that some will have to slow or stop production, which will restrict the supply of refined metal and translate into higher prices in the coming months.

Goldman Sachs has forecast copper prices will reach $10,000 per ton by the end of the year due to robust Chinese demand and “continued supply-side shock.”

Chinese copper smelters are working on a joint plan to reduce production to address raw material shortages. News of this rare move earlier this month sent the benchmark copper price soaring above $9,000 per ton.

The volatile rally was further fueled by speculative trading by hedge funds and others, which built net long positions in anticipation of a tighter market.

Margin line chart on spot purchases (Rmb per ton) showing Chinese copper smelters looking to reduce production to cope with losses.

Daniel Hynes, senior commodities strategist at ANZ Research in Sydney, said the spot market was not yet feeling the impact of the concentrate supply shortage due to abundant stocks that had built up ahead of its annual Chinese parliament meeting. in March.

The market was expecting more stimulus measures from the meeting, which sets economic targets, so producers had been stocking up for stronger growth. Now they are backtracking on that.

“Clearly, expectations around Chinese growth are also being reset,” Hynes said. “That has delayed the potential restocking that we would normally see continue into the second quarter,” she said.

But some say supply shortages will likely reappear soon as smelters begin making production cuts and falling interest rates lift demand in China and other parts of the world.

“Elevated mining supply disruptions point to a shortfall of 700,000 tonnes, and should begin to impact refined production as well,” Morgan Stanley said in a note, predicting a copper price of $10,200 per tonne for the third quarter.

Source Link

Related Posts