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MARKET COMMENTARY
In September the commodity group has been pressured by a stronger dollar, has staged a meteoric rise over the past three months and is now at a fouryear high against a basket of major currencies. In addition, a rebound in US equity markets continues to siphon money away from commodities. Weaker macro numbers, particularly out of China and Europe, have not helped commodity demand either. In the non-ferrous space, copper had its biggest monthly loss since March and there was widespread weakness in nickel and aluminum prices as well.
The stronger dollar was a common theme that unhinged many metal complexes last month, but copper was also weighed down by demand concerns emanating from China. To wit, the China’s manufacturing activity is basically dead in the water, with the official HSBC PMI number coming in at 50.2 in September, flat vs. August, while the official PMI was at 51.1, unchanged from last month. Moreover, Beijing’s various ministimulus programs seem to have failed to revive borrowing, even at low rates.
Copper and other base metals rebounded on Thursday after U.S. central bank authorities signalled they would not rush to boost interest rates, extending a period of cheap capital for industry and investors. The London Metal Exchange (LME) saw gains across the board, joining broader financial markets in responding to the release of the minutes of the last Federal Reserve policy meeting.
The dollar fell and stocks soared as investors factored in a longer time frame before any rate rises. The dollar had enjoyed 12 consecutive weeks of gains since early July, the U.S. currency's best run in more than 40 years. The strong dollar had weighed on commodity markets, making dollar-priced materials more expensive for European and other non-U.S. investors.
"It was a surprise, definitely everyone thought the dollar strength would go in one direction," said Eugen Weinberg, head of commodity research at Commerzbank in Frankfurt.
Three-month LME copper gained 1.2 percent to $6,712 a tonne by in official midday trading, erasing the prior session's small losses. LME copper is climbing away from 5-month lows at $6,600 a tonne tapped on Oct. 2.
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Copper dropped 2.2% in August, its biggest monthly dip since March. The complex was weighed down by demand concerns after a steady stream of disappointing data came out from both Europe and China of late. Although US manufacturing readings remain strong, Chinese and European figures have clearly disappointed, with the latest European number (out this week) now on the verge of contraction. With regard to trade data, China’s July refined copper imports fell 16.7% on the year, as the fallout from slower demand and the port scandal both take their toll. However, we should note that rising local production is also eating into the import share; Chinese refined production is now at a little over 630,000 tons in July, up 16% from a year ago.
Elsewhere, Chile’s copper output is also moving higher, up 2.4% to 3.33 million tons during the Jan-July period. State commission Cochilco is forecasting that the country will produce 5.95 million tons this year, slightly higher than last year. Separately, the latest data from the International Copper Study Group shows the global refined copper market in a 69,000-ton deficit in May, down from a 186,000-deficit in April. For the first 5 months of the year, the ICSG sees the market in a 466,000-ton deficit compared with a 251,000-ton surplus in the same period a year ago.
London copper drifted on Wednesday in low volume trade, with expectations of fresh supply weighing on prices and dampening investor interest. But predictions of fresh monetary support from the European Central Bank kept metals with tighter supply outlooks such as aluminium and zinc underpinned near their recent respective highs of 18 months and four weeks. Three-month copper on the London Metal Exchange was little changed at $6,921.25 a tonne, after logging a small gain in the previous session.
Expectations for further policy action at the European Central Bank's meeting on Thursday are running high after ECB President Mario Draghi pledged to use all available tools to keep prices in check.
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Copper had a V-shaped move over the course of the last month; after plunging to a low of just over $6600 in mid-June on account of jitters emanating from the Chinese port scandal at Quindao, prices shot up by about $600 a ton over the next three weeks.
We think a combination of variables set up this advance, with the most important being growing perceptions that the financing irregularities evident at the port were likely localized and not symptomatic of a larger problem. The second variable kicking off copper’s rally are increasing signs that the Chinese economy seems to be improving, as evidenced by rising PMI readings. Thirdly, copper inventory levels remain low, with draws continuing in both the LME and Shanghai exchanges. Finally, latest data from the ICSG has the global world refined copper market showing a 83,000 tons deficit in March compared with a 2,000 ton surplus in February.
London copper steadied today, but remained under pressure near two-month lows after new home prices in top metal consumer China fell in July for the third month in a row. Price falls in new homes also spread to a record number of Chinese cities including Beijing, underlining a worsening property downturn that is increasingly dragging on the broader economy.
Three-month copper on the London Metal Exchange was $6,874 a tonne from $6,870 at the close on Friday. The price fell by 1.8 percent last week, touching a seven-week low of $6,821 on Thursday, its lowest level since June 23.
"Base metals are under pressure this morning, although flows have been relatively light," Vicky Sanders, head of analytics sales at Marex Spectron in London, said in a research note.
ANZ strategist Daniel Hynes in Sydney views copper as oversold and that prices are getting to "relatively attractive levels". "In our view, fundamentals are improving, which opens up the scenario of upside surprise, if some of these outlying macro issues start to rectify themselves," he added.
Nevertheless, hedge funds and money managers slashed their bullish bets on copper futures and options in the latest week, the Commodity Futures Trading Commission said on Friday, as concerns resurfaced over the strength of global economic growth.
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Copper had a V-shaped move over the course of the last month; after plunging to a low of just over $6600 in mid-June on account of jitters emanating from the Chinese port scandal at Quindao, prices shot up by about $600 a ton over the next three weeks.
Copper moved in range of $6615-7025 last month. U.S. consumer sentiment rose in June as consumers remained optimistic the sluggish first quarter was due to difficult winter conditions. Euro zone economic sentiment fell unexpectedly in June on fears that fighting in Iraq would push up oil prices and that any escalation of the Ukraine crisis could drag on euro zone growth. On domestic bourses weaker local currency capped the downside to some extent.
Supply short fall and encouraging data from US and China will continue to assist the prices in the month of July 2014. The HSBC/Markit Flash China Manufacturing Purchasing Managers' Index rose more than expected to 50.8 in June from May's final reading of 49.4. Copper in LME is set for the biggest quarterly rise since September as stockpiles fell and amid bets that the U.S. economy will rebound from a first quarter contraction. Inventories monitored by the main exchanges in London, Shanghai and New York have plunged to the lowest since 2008. Copper seasonal demand is expected to wane going into the third quarter, though the shortage in supply is expected to keep a flor under prices.
Copper edged further off 4-month peaks today as investors took profit and stocks rose for a second day running, though lingering supply concerns put a strong floor under prices. London Metal Exchange data showed stocks rose by 2,850 tonnes - a second straight day of gains - though overall, stocks remain near their lowest levels in six years, supporting prices.
Three-month copper on the London Metal Exchange was last bid at $7,115 a tonne in official midday rings, down 0.49 percent. Copper closed down on Friday but still posted its biggest weekly rise in more than nine months, after touching a four-month peak earlier in the session.
Investors are waiting to see if record share prices will be justified by quarterly earnings reports and forecasts in the United States and elsewhere, with aluminium producer Alcoa kicking off the U.S. earnings season on Tuesday.
On the demand side, global economic activity should strengthen in the second half of the year and accelerate in 2015, although momentum could be weaker than expected, International Monetary Fund chief Christine Lagarde said on Sunday, hinting at a slight cut in the IMF's growth forecasts.
China's economic growth quickened in the second quarter from the previous three months, but further modest government support measures will still be needed, Premier Li Keqiang said on Monday.
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Copper had a strong showing in May, with prices rising 3.1%, the best monthly gain since December. The advance was helped by a tight supply picture, best evidenced by widening LME backs and dwindling stocks. LME holdings, for example, now stand at 166,000 tons, off a whopping 60,000 in May alone, while Shanghai has shed some 15,000 tons over the period. Not surprisingly, premiums are strong, although there have been signs of softening this past week in China. Prices got an additional boost from the closure of LS-Nikko Copper’s No. 2 plant in South Korea, which is out after a steam explosion in May. Having said that, there will be additional supplies coming into the market, with most estimates still calling for a 2014 supply/demand surplus. In view of all this, the ICSG sees the global world refined copper market in a 5,000-ton-deficit through February following 123,000 ton shortfall in January; CRU also has the market as in deficit for Q1.
Three-month copper on the London Metal Exchange had inched up 0.5 percent to $6,651.50 a tonne, from the previous session when it closed down 1 percent and dropped to a six-week low of $6,620 a tonne.
China's new bank lending and money supply rose faster than expected in May, as the government ramps up policy stimulus measures to energise a slowing economy.
U.S. retail sales rose less than expected in May and first-time applications for jobless benefits increased last week, but the data did little to alter views the economy was regaining steam.
Euro zone industrial output rebounded with a twice-as-strong as expected monthly rise in April thanks to energy and non-durable goods production, official data showed on Thursday, pointing to an acceleration of economic growth in the second quarter.
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Copper traded pretty much within the range of $6530-$6790for much of April, with an upward bias evident. Nevertheless, the stronger tone was not as pronounced as some of the other metals, mainly because of copper’s less-than-inspiring fundamentals. For one thing, China’s manufacturing activity remains lackluster – the latest flash HSBC PMI for April, out last week, came in at 48.3, slightly higher than March’s 48.0 reading but still in contraction mode. This is the fourth month in a row that the number is below 50 and comes after China’s first-quarter economic growth (at 7.4%) clocked in at its slowest pace in six quarters.
On the supply side, both Rio Tinto and BHP announced decent guidance for copper output this year; Rio expects to produce 830,000 tons in 2014, unchanged from 2013, while BHP is looking at 1.1 mln tons this year, rising to 1.3 mln tons in 2015. year. In addition, Mongolian copper conc volumes surged 53% year-on-year in March, as the Oyu Tolgoi project cranks up. Miners operating from Indonesia, including Freeport and Newmont, are not faring as well given the continued supply restrictions on concentrates. Chile is expected to do well, expected to produce 6.07 million tons of copper this year and 6.24 million in 2015. On the demand side, Chinese copper demand remains decent, with premiums now at their highs for the year. In addition, the government has entered the market to scoop up 200,000 tons for its stockpile last week, but prices hardly responded, somewhat par for the course.
Copper rose on Friday but was set to log its biggest weekly loss in seven after the United States' decision this week to further trim its stimulus programme, which has provided commodity markets with liquidity.
Trading was quiet though due to a holiday in top copper consumer China and ahead of a U.S. jobs report, which is expected to show that a strengthening economy likely encouraged employers to maintain a strong pace of hiring in December.
Three-month copper on the London Metal Exchange, untraded in official rings, was bid at $6,665 a tonne, after closing little changed in the previous session. Copper prices are down around 2 percent this week. "I suspect the market has already positioned for good employment data and a hint of more tapering," Citi analyst David Wilson said.
Solid demand from China has underpinned copper prices, and tight credit conditions has meant that fabricators in the world's top consumer of the metal have been running down their stocks, Wilson said. This has lifted China copper market premiums - the price paid on top of local cash futures prices to get metal - to the highest level in almost three years. Copper inventories in warehouses monitored by the LME are hovering at around 230,000 tonnes, down almost 70 percent from mid-2013.
Activity in China's factories increased marginally in April but export orders fell sharply, a survey showed on Thursday, adding to questions about whether the world's second-largest economy is stabilising after its first-quarter slowdown. But in the U.S., consumer spending recorded its largest gain in more than 4-1/2 years in March and factory activity accelerated last month, reinforcing views the economy was regaining steam.
China's markets were closed on Friday for a second day, while many continental European markets are set to reopen after a May 1 break. The LME will be shut on Monday due to a holiday in Britain.
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Copper prices finished February basically flat, as a mid-month advance to the $7250 level fizzled, sending values back down to the lower end of the trading range. Although LME stocks are now at 14-month low, it is what is happening in China that accounts for copper’s inability to gain much upside traction. In this regard, Shanghai copper stocks, in stark contrast to the LME, are at nine-month highs, while physical premiums are softening. Both these situations should come as no surprise in light of the fact that Chinese refined copper imports have been ramping up of late, with January intake at a record high of 536,000 tons, up a whopping 53% over the last year. However, much of this metal is not being consumed, but instead being utilized as a conduit via which importers are managing to get more credit from the banks. In the meantime, the overall copper balance seems to be tightening; Aurubis see 2014 to be in rough balance, while the ICSG thinks that the market was in a 107,000 tons deficit through November of 2013, adjusted for China’s bonded stocks. (The deficit projection reverses a surplus of 23,000 tons expected in October). However, these numbers are rather squishy given that no one knows how much stocks are indeed at hand in Chinese warehouses.
Copper rose for a second day to hit a one-week high on Wednesday as investors saw signs that tensions could be easing in Ukraine and after China's leaders affirmed a solid growth target for the year ahead. Fears of an immediate escalation of political tension were allayed as Russian President Vladimir Putin said he would use force in Ukraine only as a last resort, but he also delivered a robust defence of Russia's actions in Crimea. Also helping sentiment, China provided the strongest signal yet that the pursuit of breakneck growth was over, saying it aimed to expand the economy by 7.5 percent this year and would pursue reforms in areas ranging from finance to the environment.
Three-month copper on the London Metal Exchange hit its highest level in a week at $7,085.75 a tonne in intraday trade. It was $7,055 a tonne in official rings from $7,049.50 on Tuesday. The metal is still trading 4 percent lower so far this year.
"We are seeing a bit of a relief rally for copper after the geopolitical tension between Ukraine and Russia has eased off," said Naeem Aslam, chief market analyst at Ava Trade. Doubts remain on how far the recent rally can go while demand in top user China has been slow to gain steam following the Lunar New Year. China is the world's biggest consumer of copper, accounting for 40 percent of global refined demand. A growth target of "7.5 percent helps, but let's be realistic. From GDP alone I would be cautious to get euphoric," said analyst Dominic Schnider of UBS Wealth Management in Singapore. "Forward leading indicators do not make for a good picture. We had the weather-induced problems in the U.S. and now geopolitical concerns. Unless we see numbers really coming back with a vengeance in the U.S., it's going to be very tough for copper to hold the current levels," he added.
Traders are likely to focus on the outlook for the U.S. economy. Non-farm payrolls
numbers due on Friday are expected to provide fresh evidence on the pace of growth in the world's largest economy. Economists say U.S. job growth probably picked up enough in February to encourage the Federal Reserve to continue to scale back its monetary stimulus, although the gain is likely to be tepid given the unrelentingly harsh winter weather. "We do have Beige book numbers due today, which will tell us more clearly the impact of bad weather in different Fed regions, and this could sway the Janet Yellen’s decision on tapering," Aslam said.
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It’s been a one-way slide for copper over the course of January, with the complex limping to a two-month low of $7100 by month’s end. The turmoil in emerging markets has weighed on the complex, but investors think the main drag is coming from China, where there are more signs of macro deceleration. Furthermore, the outlook for February may not look much better, as the country is now on a one week break for the New Year, meaning that spot purchases and the pressure on nearby premiums could be muted for some time to come. Many have pointed to the decline in LME stocks as a reason to be bullish; if prices are unable to climb higher on falling stocks, they likely will fall when stocks start to move up. The odds of this happening are good, since from all accounts, we are seeing steadily rising output from both the refined and mine side of the picture. On the refined side, Chile’s December output was strong and 2013 production rose by an impressive 6.1%. We very well could be on track for another strong year this year. China’s refined output was up a staggering 13.6% in 2013, well ahead of local demand growth.
Copper prices rose on Wednesday, rebounding from two-month lows hit in the previous session, boosted by encouraging factory orders data from the United States overnight and limited short-term availability of the metal in the physical market.
Meanwhile data showing dwindling supplies of copper stocks, which raised concerns about immediate availability, also lent support to prices. The figures showed stocks in LME-registered warehouses are at their lowest level in a year at 311,225 tonnes.
Three-month copper on the London Metal Exchange traded at $7,060 a tonne in official rings, up from a close of $7,041 on Tuesday. The metal used in power and construction dropped to its lowest level since Dec. 4 at $7,016 in intraday trade on Tuesday, but a late-session rebound helped it avert a 10-session losing streak, which would have been its longest losing streak in 37 years. Prices have fallen 4 percent since January.
Investors are likely to focus on the U.S. non farm payrolls data for signs of the country's economic health scheduled for release on Friday.
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2013 was another down year for the commodity markets. In the metal markets, gold was off some 28%, breaking a twelve-year winning streak. Silver prices also got hammered, down some 36%, but platinum and palladium fared better on account of improving automobile demand. Among the base metals, zinc was the year’s best performer ending down some 1.6% basis three months, while nickel and aluminum were the group’s laggards, down 18.5% and 13% respectively. Copper finished some 7% lower, with lead and tin off by 4.7% and 4.4%, respectively.
In the financial markets, US equity markets were on fire; the S&P-500 was up some 29% in 2013 for its best gain since 1997. Many other equity markets also ended the year at or near records-- Japan’s Nikkei 225 rose a whopping 52%, reaching its highest level since 2007 and there were hefty gains in European markets, with 30%-plus gains seen in both the Greek and Irish equities. The gains in US equities came partly at the expense of the US bond market, where yields ended the year around 3%, a 2 1/2 year high, capping a horrific year for most bond funds.
Last month we had an upbeat market in copper, with prices gaining 4% over the course of the December and hitting a four-month high in the process. However, for 2013 as a whole, copper finished 7.2% lower, roughly in the middle of the LME pack. The December rally was driven in part by the weaker dollar, as well as continued declines in both LME and Shanghai stock holdings. LME inventories shrank by about 60,000 tons in December to end the month at about 366,000, while Shanghai stocks fell by 16,000 tons.
In terms of supply/demand balances, the ICSG sees the market in a 387,000 ton surplus in 2014, rising to a whopping 632,000 next year. However, the Reuters consensus numbers are far less, at 182,000 tons and 328,000 tons, respectively.
Copper steadied on Tuesday above the two-week lows it hit on Monday, helped by a weaker dollar versus the euro although the market was quiet as traders focused on U.S. data due later this week. Three-month copper on the London Metal Exchange was $7,335 a tonne in official prices from $7,325 at the close on Monday when it hit its lowest since Dec. 24 at $7,278.75 a tonne.
But the market was still sluggish early in the first full week of trade after the Christmas and New Year holidays, and market focus was on U.S. non-farm payrolls data and minutes of the Federal Reserve's December policy meeting, Naeem Aslam, chief market analyst at Ava Trade in Dublin, said. "We are going to look at the FOMC minutes very closely, and we think that will bring a lot of volatility to the market for the dollar," Aslam said.
In December, outgoing Fed Chairman Ben Bernanke started the process of navigating the U.S. central bank's way out of its extraordinary stimulus, beginning with shaving its bond-buying programme. A stronger U.S. currency makes it more expensive for foreign investors to purchase dollar-priced commodities, thus pressuring prices lower. The euro rose versus the dollar on Tuesday after data showed euro zone inflation fell last month.
The Federal Open Market Committee's (FOMC) minutes will be released on Wednesday and the non-farm payrolls numbers on Friday.
Speculative investors increased their net copper longs for a third consecutive week in the week to Dec. 31, data from the Commodity Futures Trading Commission showed, climbing by 6,147 contracts to 35,635, the highest in nearly two years.
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Copper prices on the LME fell 2.5% last month as momentum traders (mainly money managers and hedge funds) increased their bearish positions. However, fundamentals have been supportive throughout the last month because of which prices did not continue below $7,000.
Appetite for refined copper was strong as inventories at LME warehouses fell throughout November. At Shanghai, inventories fell last month by more than 16%. This is astonishing since November is usually a time of re-stocking, implying mounting inventories. At Shanghai-bonded warehouses, inventories are at the lowest since June 2012. From August to October, overall copper imports to China, the world’s largest consumer of the red metal, have been very strong, coming above 1.2 million tons. The November figure is expected to come above 470,000 tons.
On mainland China, demand for copper has been strong as borrowers use copper inventories as collateral for short-term financing. The liquidity squeeze in the interbank money markets in October and June prompted investors to use copper for financing. Demand for copper should also get a boost in December because of seasonal re-stocking.
Cash-3 month forwards, a gauge of physical tightness, has been high, implying a shortage of refined metal in the spot market. It is currently at -$0.75 compared to -$30 at the start of October. Chinese importers of refined copper are confident about demand in the first quarter of 2014; hence, it makes sense for them to have agreed to pay a premium of $131 a ton to Codelco (the world’s largest copper miner) in order to secure term shipments. The Premium has risen 41% y-o-y.
Copper has whipsawed in the past month but was able to stay above $7,000 due to a shortage of refined metal in the physical market. Data from the U.S. were quite encouraging, reinforcing expectations that the U.S. central bank might reduce the size of its bond-buying program especially since it mentioned in its last minutes that it would be looking to “taper” in the next few meets.
Copper rose on Friday, underpinned by tightening near-term supply but gains were capped ahead of U.S. jobs data that could signal an imminent scaling back in U.S. stimulus. This week markets have been nervous about an increased risk of tapering, after a string of U.S. data came in above forecasts, including numbers for U.S. private employers, factory output and GDP.
Three-month copper on the London Metal Exchange was $7,112 in official rings from a last bid of $7,068 on Thursday, leaving the metal little changed on the week, and still set to post losses of more than 10 percent this year.
"The market is concerned that (the Fed) might taper in December. On the other hand if you look at copper inventories (they) already provide indications that the market has been oversold," said Quantitative Commodity Research consultant Peter Fertig.
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