Investing.com — Prices have fallen sharply recently, dropping below $9,000 a tonne for the first time since April, the result of a confluence of factors including rising inventories, disappointing manufacturing data and the results of China’s Third Plenary Session.
Despite the recent weakness, analysts at UBS Global Research remain bullish on copper’s medium-term outlook. “We reiterate that $9,000/ton represents an attractive entry point to consider over the medium term,” they said.
Supply constraints expected to support prices
Several factors underpin UBS’s positive outlook on copper. First, visible inventories have increased somewhat but remain low by historical standards, suggesting a supply-demand imbalance may emerge in the future.
Second, major copper miners reported lower-than-expected production in the second quarter, indicating continued supply constraints, as evidenced by the fact that Codelco’s production is down 7% year-to-date.
Speculation fever calms down
Copper’s recent price correction has been accompanied by a reduction in speculative positioning, suggesting that the market is cooling off and that the price decline is more likely to reflect cyclical and policy-related headwinds rather than a fundamental shift in the copper market.
Short-term headwinds
UBS has warned that near-term demand for copper has been weaker than expected, which has led to inventories building up, but analysts expect this to be a temporary phenomenon.
UBS specifically attributes the weak demand to weak interest in refined products from end-users in China, which is exacerbated by the drawdown of intermediate stocks and delayed purchases by state-run power companies.
UBS recommends considering buying copper at the current price level of $9,000/tonne as a medium-term investment strategy. Additionally, the analyst suggests selling downside price risk to generate additional yield over the next six months.
