Short term: The LME three-month copper price is still trading below its 20 DMA, suggesting vulnerability to a renewed sell-off toward its 2019 low. A daily close above the 20 DMA could entice momentum-based buyers back into the market, pushing prices higher. The current rebound looks like a technical retracement so we remain cautious in the immediate term.
Long term: Copper is still in an uptrend from a very long-term point of view, trading above the major UTL and the 200 MMA. If the 200 MMA breaks on a monthly closing basis, the next key support will be at the UTL.
Macro and micro drivers
Copper is up around 1% on Friday January 11 amid a broad-based rebound in LME base metals (+1% on average). It is up a little lower than 1% on the week.
Upward pressure stems from further dovish rhetoric from US Federal Reserve Chair Jerome Powell and vice chair Richard Clairda prompting the market to price in a pause in the Fed's hiking cycle; and US-China trade developments - vice premier Liu He is due to meet US officials later this month after three days of constructive talks this week. While the dollar is edging down, risk appetite in China is brighter, producing a friendly macro backdrop.
China plans to lower its economic growth target to 6-6.5% in 2019 from "around 6.5%". But this should not become official until March. Because market participants trust China's official GDP growth data - perhaps too much - the reaction in the financial markets is muted. What matters for investors is whether Chinese authorities will loosen their fiscal/monetary policy stance. Due to growing risks to Chinese economic growth, China could implement more easing measures this year, which should be copper-positive.
In the physical market, the Shanghai copper premium rose from its lowest in more than a year because of the narrowing, negative import arbitrage for bringing units into China, which made buying more attractive. Upward pressure is emerging in the US copper-cathode premium due to a tightening in domestic scrap availability following weeks of inactivity during the year-end period. The European physical market remains quiet.
LME nearby spreads are still loose. The cash/three-month spread, in a contango since December 13, is at $22.25 per tonne , having averaged a contango of $21 per tonne so far this year. This signals a slightly weaker appetite for immediate consumption.
Today, investors will focus on the US CPI, expected to have dropped 0.1% on a monthly basis in December. A weaker-than-expected reading could push the dollar lower and exert upward pressure on copper.
Flows in exchange inventories
Global exchange inventories continue to drop so far this year, suggesting a tighter refined market (assuming no change in invisible inventories):
- LME stocks, at 133,700 tonnes as of January 10, are up 1,525 tonnes or 1% so far this year after dropping 2,025 tonnes, or 1.5%, in December. They fell by 69,550 tonnes, or 35%, in 2018.
- SHFE stocks, at 97,979 tonnes as of January 11, are down nearly 21,000 tonnes or 17%, so far this year (including a fall of roughly 11,000 tonnes this week), having dropped 16,000 tonnes, or 12%, in December. They tumbled by 31,800 tonnes, or 21%, in 2018.
- Comex stocks, at 95,656 tonnes as of January 10, are down nearly 5,000 tonnes or 5% so far this year (including a fall of around 3,600 tonnes this week) after they dropped 25,330 tonnes or 20% in December (including a fall of nearly 4,000 tonnes last year). They dropped by about 91,000 tonnes, or 48%, in 2018.
The refined copper market was in a deficit of 168,000 tonnes in September 2018, the ICSG estimates, with September the sixth straight month of deficit.
In the first nine months of 2018, the refined copper market was in a deficit of 595,000 tonnes, with the 2.6-million-tonne deficit in China more than offsetting the 2-million-tonne surplus in the rest of the world.
In the first nine months of 2018, refined production grew 1.1% and consumption increased 3.2%, all on a yearly basis. Global mine production rose 2.8%, including a drop of 5.6% in China and a rise of 7.3% in Peru, all on a yearly basis.
The combined fall of 118,000 tonnes in global exchange inventories in the final quarter of 2018 suggests that the refined copper market continued to tighten.
We are constructive on copper for the first quarter of the year, expecting macro sentiment - the chief near-term driver of the copper price - to shift positively on China's easing policy, the de-escalation in the US-China trade dispute, stronger global growth expectations and a more dovish Fed. This should result in market participants revising the forward balance of the copper market more positively.
Trading positioning: We could open a hypothetical long position in LME copper if momentum improves again.