By Jim Williams
Summer is usually a time for amusement parks and roller coaster rides. When it comes to copper, the daily ups and downs can be far less than amusing.
So it goes again this week. After hitting a two-month high on Monday, copper dipped Tuesday after producer hedging, a firm US dollar, profit-taking, and rising inventories sparked a sharp sell-off. All of these forces were generated by renewed worries over the global impact of Britain’s exit from the European Union. Now there are concerns that financial and political instability in Italy could lead to even more chaos in Europe.
“The market is beginning to focus on the wider euro zone risk as well,” said Ric Spooner, chief market analyst at CMC Markets in Sydney. “The worst case scenario for markets would be the forcing of another euro zone emergency where the referendum is lost leaving Italy without effective government and a looming banking crisis that can’t be solved without compromise between the different national interest groups within Europe,” added Spooner.
In related news, stocks of copper in LME approved warehouses rising 10,525 tons to 198,925 tons also prompted some selling. The inventory has risen by 45 percent since June 1.
“It’s just a re-arrangement of stocks,” said Vivienne Lloyd at Macquarie. “China overstocked in the early part of the year with extremely high imports while the LME has been extremely underfed. Copper has been sold on the back of this inflow. The other metals are also taking that direction and it looks like people have seen it as a turning point for the others.”
“Overall LME stock levels are low given the size of the market, that’s why some people don’t want to play copper from the short side,” ICBC Standard Bank analyst Leon Westgate told Reuters. “Central banks have said if the growth deteriorates massively they are ready to stimulate, and money sloshing around the system tends to be a positive for commodity prices.”
Frequent contributor Andrew Hecht from Seeking Alpha says copper’s results for the second quarter were disappointing compared to other base metal prices and commodities as a whole. “The energy, grains, and soft commodities sectors all posted impressive gains, but copper’s performance was sub-par,” states Hecht. “Perhaps, a primary reason for the lackluster return is the huge inventories floating around in Asia.”
“The global economic landscape remains a hotbed of uncertainty,” continues Hecht. “The bottom line is that the developments surrounding the Chinese economy will continue to dictate the prices of base metals for the rest of 2016. The U.S. presidential election in November could be a source of volatility for markets across all assets classes, and base metals prices would be no exception. We have seen some promising signs in Q2. Be cautious in these markets, I expect volatility will continue to increase.”
You can read Hecht’s Seeking Alpha article looking back at Q2 and looking ahead to Q3 here. You can also follow him on Twitter.
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