COPPER TODAY: Price rebounds overnight but we maintain our cautious view

Very short term (1M): Flat
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Up
R1 6,190 - 200 DMA
R2 7,500 - key level
S1 5,923 - 200 MMA
 S2  4,950 - major UTL

D/MMA – daily/monthly moving average
U/DTL – up/downtrend line
ADX – average directional index
RSI – relative strength index
LME - London Metal Exchange
SHFE - Shanghai Futures Exchange
ROW - Rest of the world
ICSG - International Copper Study Group
COTR - Commitment of traders report

Technical drivers
Very short term/short term: The LME three-month copper price has rebounded overnight and is attempting to movre back above its 200 DMA. A daily close above this level could stabilize prices. Otherwise, copper could retest the year-to-date low of $5,725 per tonne.

Long/very long term: After copper failed to overcome its 20 MMA last month, selling pressure has intensified since the start of May, with the next support at the rising 200 MMA.

Macro and micro drivers 
The 11th round of US-China trade negotiations this week has failed to produce a trade deal, prompting the United States to raise its tariffs from 10% to 25% on $200 billion of Chinese goods exported to the US - a decision that "China deeply regrets" and that will force China to "take necessary countermeasures," it said.

Despite the renewed escalation in the US-China trade dispute, investors are not panicking this morning. Chinese and global equities are instead showing gains and the yuan is stronger, resulting in strength across the metals apart from zinc.

LME copper is up 0.3% so far this morning but remains down around 1% so far this week. Given the decline in open interest since Monday, we believe copper's weakness has been primarily driven by long liquidation.

The LME cash/three month spread is in a contango of $12 per tonne, in from $18 per tonne yesterday. Looser nearby spreads are also a sign of gross long liquidation.

Based on NBS data, our calculations show that apparent consumption for refined copper dropped by around 5% year on year in the first quarter. Our analysis of various downstream copper sectors shows a rather weak demand picture in China. But Chinese copper stocks (SHFE+bonded) have dropped notably since the start of the second quarter, suggesting perhaps improved domestic demand.

Interestingly, some traders who sell material into the downstream market said during LME Asia Week that Chinese copper demand is stable compared with previous years, adding that the market is excessively worried about Chinese copper consumption.

Supply/demand balance
The International Copper Study Group (ICSG) estimates that the refined copper market was in a deficit of 8,000 tonnes in January 2019 after a deficit of 391,000 tonnes in the whole of 2018. For more details, please refer to COPPER FUNDAMENTALS: ICSG review.

We continue to see additional weakness in copper prices in the immediate term due to an absence of tight refined market conditions and a challenging macro backdrop stemming from renewed US-China trade tensions. 

Trading positioning: We could open a hypothetical long position in LME copper if momentum improves again.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.


May 10, 2019

11:37 GMT