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Optimism in the copper market had been running exceptionally high since the start of the year on expectations for industrial metal demand to recover in tandem with an improvement in the global economy. A good portion of the gains in copper leading up to the January high was based on expectations that China’s voracious copper demand would remain robust this year, while rising investor risk appetite tied to the weak Dollar also provided significant price support. But there have been a few fundamental, economic and political shifts over the last month that have changed the mood. We see a strong enough change in sentiment to suggest more of last year’s premium will be pulled out of the market and leave May futures vulnerable to an eventual test of the $2.85 price level.
Perhaps the biggest factor impacting the trend change in copper has been China’s move to tighten bank liquidity, that has escalated concerns that copper demand will soften as China’s economy cools. As there seems to be growing speculation that China will have to tighten interest rates even more aggressively during the year, the market is beginning to price in a lower demand outlook from Asia, and that could end up being a longer-term weight on the copper market. With most of the economic news in January coming in soft, it still doesn’t appear that the pace of recovery in the US economy, at least in the key copper industries of construction, transportation and machinery, will be strong enough this year to support copper prices at these inflated levels.
With the copper market in the midst of scaling back demand expectations, we suspect that it will feel a strong impact from high supplies. Copper warehouse stocks at the LME have seen a steady rise over the last several months, recently reaching a one-year high. This also raises doubts over actual copper demand. The Dollar is currently in a fairly convincing uptrend, being supported by a variety of factors, and this could be another bearish influence for copper over the near term. We also think traders shouldn’t underestimate the bearish impact from the harsh political regulatory climate. The government’s move toward imposing tighter position limits and the Obama Administration’s push to restrict proprietary trading by banks could certainly change the investment landscape and would likely have a negative impact on copper prices as well.
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