Bloomberg /New York
If you’re seeking reassurance that the global economy will soon pull out of its funk, don’t look to copper.
That’s the view of analysts including Mike McGlone of Bloomberg Intelligence and Max Layton of Citigroup Inc, who say the malaise in the commodity that’s considered an economic barometer could deepen.
Copper futures in New York fell for four of the past five months, adding to signs of a global slowdown that have prompted moves from the Federal Reserve and other central banks to shore up growth.
“What deteriorating economic sentiment could really use is a shot of encouragement from copper prices, but we fear the greater risk is a decline,” McGlone said in a note. “The copper price is teetering on a support cliff and risks suggest a fall is more likely than not.” The following charts show why some analysts think copper could have further to fall.
With a short position in US copper futures and options already near a record, it may seem that there’s not a lot of room for money managers to push the metal much lower.
But outside the US it’s a different story. Combining Comex with the larger London Metal Exchange suggests total positioning excluding China has leeway for further declines, according to a report from Citigroup Inc.
Additionally, “tame” copper open interest in Shanghai futures “implies that the Chinese speculative community is yet to position with any real size,” according to Citigroup, which earlier this month revised down forecasts for copper, zinc and aluminium.
If Chinese speculators put on the median short position seen in the five bear-market periods during 2013-2016, that would result in a copper sell-off of about $800 a metric tonne, taking the price from about $5,700 a tonne to $4,900, the bank said.
Copper prices appear elevated based on their relationship with a measure of stock-market volatility, according to BI’s McGlone.
A breach of Comex copper’s support level of about $2.50 a pound may be nearing, based on increases in the Cboe Volatility Index, he said.
While many analysts expect copper demand to outstrip production this year amid a dearth of new mines, supply concerns for now are being outweighed by worries over the outlook for consumption of the metal. Global copper inventories tracked by exchanges in London, Shanghai and New York have risen from a four-year low reached in January, helping keep a lid on prices.
In a report on August 16, Michael Widmer at Bank of America Merrill Lynch pointed to the potential for an expected copper deficit next year swinging to oversupply, keeping prices “range bound” and supporting the bank’s 12% cut in its 2020 price estimate. Manufacturing gauges in China and Germany, the No 1 and No 3 users of copper, respectively, have been sliding, dimming the demand outlook for the metal used in everything from automobiles to plumbing pipes.
China posted the weakest industrial output growth since 2002 in July, while in June German production registered its biggest annual decline in almost a decade.
Purchasing managers’ indexes in both countries have shown contraction, fuelling concern about a broader global slowdown in manufacturing.
BHP Group warned this week that cooling growth in China and global threats to free trade present key risks to raw-materials prices over the next year, with oil and copper remaining highly susceptible to swings in global policy uncertainty.
“Spot sub-index appears like an ocean liner that has reversed course,” BI’s McGlone said. “It’s heading south along with primary drivers. Fed easing is unlikely to reverse these trends.”
Too Bearish? Not all analysts expect further declines in the metal. Jeffrey Currie, head of commodity research at Goldman Sachs Group Inc, said the copper market “has priced in a much larger slowdown then what you’re seeing in the economic data,” and that the record bearish bets on the commodity leave the potential for a price rebound. Also, global exchange inventories are still down more than 42% from a high reached in early 2018, pointing to prospects for increased demand as those stockpiles are rebuilt.
“You begin to destock a lot of these goods because you are waiting for a trade war to be resolved,” Currie said in an interview with Bloomberg Television. “You’re going to have to go in and replace these inventories, which should give you a pop” in the price, he said.
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