LME copper has consolidated since it reached its highest level since January 2014 last week. Bouts of consolidation after a fresh high tend to be healthy and transient.
The nearest support is at $7,000 per tonne, a retest of which cannot be ruled out in the next week or so.
But momentum-based indicators are positive, leading us to target higher highs over a one-month horizon.
We maintain our positive technical view on copper.
Macro and micro drivers
LME copper is down a little bit more than 2% so far this week amid broad-based downward pressure across the base metals. The LMEX dropped 1.6% in the first four trading days of the week. But nearby spreads have tightened notably. The cash/three month spread is at $4c per tonne, up from $12.50c on June 12.The lack of carry-trade buying may remove a potential support to copper prices.
The weakness in base metals is primarily attributed to the recent signs of slowing in Chinese economic growth, evident in the much weaker-than-expected activity data for May.
Apart from disappointing Chinese econ data, the latest round of central banks’ decisions; in the US (25bp rate increase in the target for the Fed funds rate), the Eurozone (rates unchanged until at least summer of 2019), and Japan (rates and forward guidance unchanged), resulted in a notable appreciation in the dollar.
In turn, copper and other base metals have witnessed some downward pressure.
Global risk-taking appetite could fall sharply in the near term after US President Trump approved on Friday June 15, tariffs on $50 billion worth of Chinese imports. This is likely to elicit a Chinese tit-for-tat response over the weekend. A pronounced wave of de-risk could push copper lower.
The LME copper weakness since Monday has been driven by fresh selling (rather than long liquidation), judging by the increase in open interest. This is indicative of an increased bearish sentiment.
In the physical market, the Shanghai copper cathode market remained depressed over the past week amid widening import losses and a backwardation in nearby London Metal Exchange spreads. Meanwhile, premiums edged up in Rotterdam and Italy amid better demand and the US premium held at a 22-month high.
Investment funds turned more bullish on copper last week, the latest LME COTR shows.
Flows in visible inventories (LME and SHFE)
LME stocks - at 294,700 tonnes as of June 14 - are down by 23,250 tonnes or 7% so far in June (including a fall of 4,800 tonnes this week and a drop of 15,850 tonnes last week) after they fell 7,575 tonnes or 2% in May. They are up around 94,000 tonnes or 47% in the year to date after falling by about 112,000 tonnes, or 38%, last year.
SHFE stocks - at 253,017 tonnes as of June 15 - are down 15,368 tonnes or 6% so far in June (including a fall of 3,013 tonnes this week) after they rose 22,522 tonnes, or 9%, in May. They are up by around 103,000 tonnes or 68%, for the year to date after dropping by nearly 4,000 tonnes, or 3%, in 2017.
The International Copper Study Group has pegged the refined copper market in a surplus of 109,250 tonnes in January-February 2018 compared with a surplus of 125,410 tonnes in January-February 2017.
We maintain our friendly copper view in the near term, treating the recent price weakness as a purely technical consolidation, unlikely to last too long. Although macro factors have started to turn negative (stronger dollar, weaker risk-taking appetite, disappointing Chinese macro data), we expect the fundamentals to move in the right direction in the course of 2018, leaving the market in a deficit. As such, we are induced to buy the dips.
We have a hypothetical long position in copper that we initiated at the start of 2017. We decided to tighten our stop-loss to $6,500 per tonne from $6,000 per tonne to maintain a favorable reward-to-risk ratio. We expect a break above the 2017 high this year.