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Copper Forecast: Cloudy With A Chance of Getting Worse

By Jim Williams

Copper was trying to make a comeback in early morning trading after the red metal bottomed out at a 10-week low at the closing bell yesterday. Copper edged higher in London this morning after news of lower supply in Chile and as funds covered short positions after more than a month of declines in the price of the metal.


Despite this morning’s early boost, experts say the recent downtrend could be showing that demand may be weakening in China, the world’s largest consumer, as stocks of the metal flow out of the country to warehouses elsewhere in Asia.

The trend to a weaker demand in China goes back to the  government stimulus in the first half 2016 when we saw prices rise to a peak of $5,131 a ton in March, giving hopes to some of the world’s largest miners. Fast forward to this week and copper traded at $4,607 a ton Tuesday, or just under $2.08 per pound.

Many analysts do not expect the copper market to recover until 2018, when supply starts to tighten due to an expected lack of investment in new mines. Credit ratings company S&P Global Ratings said it forecasts a price of $4,600 a ton for this year as the market remains oversupplied, rising to $4,850 a ton in 2017.

“Copper will fall below $2 before the end of the year,” boldly predicts Dane Davis, an analyst at Barclays Plc. The market will face a “difficult time” in the second half after China front-loaded its economic stimulus and the efficacy of such measures starts to fade, he said.

“Momentum is starting to stall in China and people are starting to offload the metal in other markets,” adds Davis. “There’s strong availability of supply, and demand has been tepid and started to cool off in May and June.”

Back here in the U.S., the world’s No. 2 copper user, the two leading presidential candidates have pledged to step up spending on infrastructure if elected. In Japan, Prime Minister Shinzo Abe’s government has reportedly committed to spend $61 billion on infrastructure.

“Copper is very important in infrastructure building, so if some of these countries decide they need to start repairing a lot of their infrastructure, that would be a big help for demand,” said John Kinsey, a Toronto-based fund manager at Caldwell Securities Ltd. “With the closures of the uneconomic mines, when the pick-up does come, there will be a shortage initially. And of course, additional supply does come on eventually, and then there’s too much supply and then the cycle starts again.”

Other Key Data This Week
Investors are waiting for several measures of the U.S. labor market, including the ADP private payrolls figures, due later Wednesday, and the monthly jobs report on Friday. Federal Reserve Chairwoman Janet Yellen emphasized last week that the course of interest rates remained data-dependent, and strong employment figures could bolster the chance of a move in September or December.

Expectations of higher U.S. interest rates have boosted the dollar. That makes metals such as copper more expensive for those holding other currencies.

On Thursday, investors will also be watching manufacturing data out of China, the world’s largest consumer of copper.

We will keep an eye on all of the activity and report its impact on the red metal next week.

Further Reading
Fast Markets has published its third quarter forecast for copper. Here is a snippet from the story:

For the third quarter, we expect prices to trade in a $4,750-5,270 range. In the first half of 2016, three-month copper prices have averaged $4,694; with prices in the second half expected to average around $5,000, we have lowered our average price for the year to $4,850 from $5,000.

You can read the entire article here.

 

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