Copper has soared since late November in response to a number of supportive policies in China and Beijing’s sudden withdrawal of Covid limits. It has also benefited from the weakening US dollar, which recently plummeted to a level not seen in almost seven months due to rising expectations of a less aggressive Federal Reserve based on softer inflation and job statistics.
Chinese stimulus to help prices
On January 8th, the “Zero-Covid” policy was formally dropped when overseas arrivals were no longer required to be quarantined. This led to an eventual normalization of the economy, accelerated by China’s relaxation of Covid restrictions.
Furthermore, in recent weeks, Beijing has published a number of policy initiatives that have bolstered faith that the economy is stabilizing, therefore enhancing the outlook for strategic metals such as copper. For almost two decades, the expansion of China’s real estate industry and the country’s fast urbanization have been the primary drivers of copper demand growth.
In its most recent response, China intends to let some real estate companies to increase leverage by lowering borrowing limits and delaying the waiting period for reaching debt objectives. The action would loosen the tight “three red lines” guideline that had contributed to a historic real estate crisis, hence decreasing demand for industrial metals.
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The Chinese economy finished 2022 in a severe decline. In December, factory activity in the country declined at the quickest rate in nearly three years. According to the National Bureau of Statistics, the official manufacturing purchasing managers’ index (PMI) decreased to 47 from 48 in December. It was the worst decline since February 2020 and represented the index’s third consecutive month of decrease.
At the National People’s Congress in March, it is expected that further stimulus and infrastructure investment will be announced, which would likely increase demand for commodities even further.
Low stockpiles support increasing prices
Copper demand is increasing at a time when global inventories maintained by exchanges remain low. Last year, diminishing stockpiles were masked by sluggish global demand, but this year, a rebound in demand might create the stage for more shortages and price rises.
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Copper stockpiles in LME warehouses continue to be low, reflecting only two days of global use. Additionally, stocks on the SHFE and COMEX are exceedingly low. Global copper stockpiles are currently down to a few days of use across all three exchanges.
Copper has made a clear breakout above the 200-day moving average (the blue line), implying further gains are ahead. The support is at previous highs near $3.93, while the target for the ongoing bullish wave could be at $4.50.
Copper futures 1D chart, source: investing.com, author’s analysis