Copper has experienced a massive rally this week as market sentiment shifted notably, pushing the metal higher by 5% since Monday.
Waning supply, but improving demand
Copper prices will reach an all-time high this year according to some analysts. This should be due to a comeback in Chinese demand which threatens to deplete already low inventories, according to Trafigura, the largest private metals dealer in the world.
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In recent weeks, global stockpiles of the metal used in everything from power cables and electric vehicles to buildings have plummeted to their lowest seasonal level since 2008. This leaves little room for maneuvering if China’s demand continues to accelerate. Trafigura states copper prices may surpass $12,000 a tonne in the next 12 months due to extremely low inventories.
Moreover, concerns regarding copper supply on the LME market have returned as cancelled warrants (metal designated for delivery) account for 45% of the total 73,475 tonnes, up from 29% a week ago. This resulted in a three-month premium, or backwardation, for cash over copper contracts, indicating a tighter supply and demand imbalance.
In January, the processed copper industry had a surplus of 103,000 tonnes, compared to an excess of 10,000 tonnes in February, according to the International Copper Study Group’s (ICSG) most recent monthly report. Furthermore, global refined copper production was 2.27 million tonnes, and consumption was 2.16 million tonnes.
Solid Chinese demand to push the price higher
As per figures from the National Bureau of Statistics, China’s refined copper output increased by 10.6% in the first two months of the year to 1.95 million tonnes. Moreover, Chinese copper consumption increased by 13% year-over-year in February, as activity ramped up following the Lunar New Year, which occurred earlier than usual this year.
As a result, Goldman Sachs anticipates that visible copper stockpiles will be depleted by the third quarter of this year if China’s demand continues to grow as rapidly as it did in February. According to the bank, copper is anticipated to reach $10,500 per tonne in the near future before reaching $15,000 by 2025.
However, everything in the markets is always balanced, as some market participants believe the copper shortages and price increases will be noticed later in this decade. The world’s largest mining corporation, BHP, reported that additional supplies from Peru, Chile, and the Democratic Republic of the Congo will maintain the market in surplus for the next two to three years.
Weekly resistance ahead
The medium-term downtrend line is currently challenging the bulls at around $4.125. If bulls are able to push copper over this level, we might witness a robust rebound aiming at the highs of the year above $4.37, with a possible extension to $4.50. It would result in a 10% increase from current pricing.
Before last week’s lows in the $3.390 region, the psychological threshold of $4 provides support on the downside. The bears will keep up the fight and aim for this level. In case they are successful, they will aim for the next level which can be $3.500
Copper futures 1W chart, source: tradingview.com, author’s analysis