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Traders are betting on tighter copper markets in the coming months as disappointment over slowing Chinese economic growth outweighs concerns about tight global supplies.
The June delivery price for copper, a key barometer of the health of the global economy because it is used in everything from buildings to power lines, was $8,832 a tonne, $105 above the spot price. The gap between current and future deliveries is the largest ever in records dating back to 1994, according to Bloomberg data.
Analysts say the wide gap reflects the current abundance of supply and worries the situation could change quickly.
Traders have cut their expectations for demand for the red metal from China after the Chinese government’s stimulus package earlier this month was weaker than expected. “The actual recovery is [consumer] “Demand is not as strong as expected,” said Zhang Jiefu, senior analyst at Wuhan-based Zhengxin Futures. “I’m very cautious about purchasing at this point.”
Macquarie expects Chinese copper demand growth to slow to 3.9% this year from 6.7% last year.
Rising interest rates are also a key factor behind the copper price differential, as the higher funding costs associated with physically storing the metal for traders will encourage a shift to longer-dated commodity futures. .
However, many traders are betting on supply shortages as production cuts by miners begin to take effect. Macquarie has revised down its 2024 copper supply forecast by 1 million tonnes since September last year.
Reductions in production may delay the ripple effects throughout the supply chain. Many copper smelters that refine raw materials into metal are losing money because too many facilities compete for tight supplies. Traders expect some companies will be forced to slow or halt production in the coming months, tightening supplies of refined metals and pushing prices higher.
Goldman Sachs predicts copper prices will reach $10,000 a tonne by the end of the year due to strong Chinese demand and “ongoing supply-side shocks.”
Chinese copper smelters are working on joint production reduction plans to address raw material shortages. News of the unusual move earlier this month sent benchmark copper prices soaring above $9,000 a tonne.
The volatile rise in prices was further accelerated by speculative trading by hedge funds and others who took long positions in anticipation of market tightening.
Daniel Hynes, senior commodity strategist at ANZ Research in Sydney, said the spot market was still experiencing the effects of tight supply of concentrates as ample inventories built up ahead of the China Rubber Stamp Congress annual meeting in March this year. He said he didn’t feel it.
Producers were stocking up in anticipation of strong growth as markets expected further stimulus at an economic targets meeting. Now they are withdrawing it.
“Clearly expectations for China’s growth are also being reset,” Hines said. “That has delayed the potential for inventory replenishment, which would normally last until the second quarter,” he said.
But some say the shortage is likely to worsen soon as smelters begin cutting production and lower interest rates boost demand in China and other parts of the world.
“Expanding mine supply disruptions represent a 700,000 tonne deficit and should start to spill over into smelting production,” Morgan Stanley said in a note, adding that through the third quarter, the copper price would be I expected it to be $10,200.
