Weak demand and bearish investors keep copper prices down
Published by ChAIJun 1 2023
The cash price for LME Copper contracts has been hovering around the $8000 per tonne mark over the past 10 days, and indeed has dropped below it at points. The metal has been on a downward price trend since late January, which has accelerated since mid-April and means the metal is trading at its lowest prices since November last year. The red metal is famously a strong indicator of global macroeconomic health, so in this week’s blog we will look at some of the key factors to watch in the copper market.
A fundamental reason behind the weakening copper price has been the lack of demand, particularly from manufacturing sectors around the world. While long-term bullish outlooks for copper focus on a future supply deficit for the red metal due to widespread uptake of electric vehicles, the reality is that this deficit does not exist at present. The manufacturing PMI figure for May was below 50 in both the United States and China, at 48.5 for the former and 48.8 the latter, which indicates negative growth in both superpowers. Elsewhere, further evidence of weakening demand can be seen in Japan’s factory output falling by 0.4% in April and South Korea’s falling by 1.2%. Both nations are major hubs for manufacturing electronic goods and therefore sources of demand for copper.
Another factor that is both a signal of weak demand and driver of downward price movement is increasing stock levels at both LME and COMEX warehouses. While still relatively low, COMEX Copper stocks have almost doubled since March 23rd, when they stood at around 14,600 tons, to now total just shy of 28,000 tons. LME Closing Stocks, meanwhile, have been on a similarly positive rally since mid-April, almost doubling between April 19th and May 29th. As noted by the Financial Times, this reflects the higher storage costs incurred due to increased interest rates, which has led to banks offloading their stocks rather than holding supply.
The two aforementioned market drivers reflect the change in outlook of the banks and other financial institutions towards copper. While late Q4 2022 and the January of this year were fuelled with optimism of a post-pandemic commodity supercycle, the reality of global economic recovery has been different. As a result, there has been a significant shift in the positioning of the market participants in the last few months. As shown in the graph below from ChAI’s platform, Non-Commercial positions have developed from a net-long position of 40,000 contracts on January 24th to a net-short position of almost 18,000 contracts by May 23rd.
Positioning on COMEX Copper Contracts, shown in ChAI’s Platform
The same shift in momentum has also occurred, if somewhat more slowly, on the LME. Andy Home noted in his recent column for Reuters that investment funds have turned net short on LME copper “for the first time since June 2020.” At the same time, many banks have recently revised their price forecasts for major commodities, with the bullish narratives of Q1 2023 looking increasingly out of touch. For example, Goldman Sachs slashed its copper price forecast for 2023 from $9750 per tonne to $8698 per tonne.
Long-term Supply Increase
A final factor to watch in copper markets is recent investment into expanding the mining supply of the metal. Copper prices may have come down from the peaks of the last 2 years, but given the forecast of increased demand year-on-year over the next decade, several mining companies are seizing the opportunity to part with capital in the short-term to position themselves for profits at the end of the decade. Glencore, for example, have plans to invest $1.5 billion into increasing the scope of its Antapaccay mine in Peru, according to Reuters. This also marks a significant increase on the $590 millionthat was previously announced as investment for the mine. Elsewhere, BHP announced it has partnered with Microsoft to use AI to improve “copper recovery at the world’s largest copper mine.” The project is taking place at the Escondida mine in Chile, one of the production sites that ChAI monitors with satellite data, and demonstrates the innovative approaches that mining companies are willing to trial in order to increase copper production despite its low price at present.