For a metal like copper, its use in everything from heavy industrial machinery to modern electronics means the market is closely linked to economic change, and the retreat signals a signal from commodity markets that efforts to bring prices back under control have some early success. The mood in metals has worsened, even as the blockade of Covid-19 in China begins to ease, and there are signs that traders there are betting that copper prices will fall further.
“Even if China recovers in the second half of the year, it will not be able to raise prices back to new heights on its own – that age has passed,” said Amelia Xiao Fu, head of raw materials strategy at BOCI Global Commodities, by telephone from London. “If other major economies go into recession, China will not grow at an extraordinary rate either.
China’s manufacturing activity is already shrinking, and S&P Global’s performance on Thursday showed European production shrinking for the first time in two years, while US production hit a 23-month low. However, the scale of the accelerating sales of copper and other industrial metals suggests that investors are betting on a much sharper decline in demand in the coming weeks.
Copper hit a 16-month low of $ 8,122.50 a tonne on the London Metal Exchange on Friday, a drop of 11% so far in June, setting it at one of the biggest monthly losses in 30 years. Aluminum to zinc metals also fell, and the Bloomberg Industrial Metals Spot sub-index fell 26 percent this quarter, targeting the biggest drop since late 2008. Tin fell more than half of its peak in March.
Metals were more affected by other commodities such as crops and energy – where supplies and trade were more affected by Russia’s invasion of Ukraine. The Bloomberg Energy Spot sub-index rose 10% since the end of March, while the corresponding agricultural index fell 9.7%.
Yet the markets for copper and several other metals are still facing some of the narrowest supply conditions to date. With declining stocks worldwide and little sign of a significant new supply, even hard copper bulls like Goldman Sachs Group Inc. warned that destroying demand may be needed to ease tensions.
The collapse of industrial metals began earlier this month after the Federal Reserve raised interest rates by 75 basis points and warned that its efforts to regain control of high inflation risk causing a recession. But the sale accelerated last week, even as investors in other markets began to price at an earlier end of the Fed’s interest rate cycle.
The Federal Reserve has warned that there is little impact on supply-side drivers, which are at the root of the surge in commodities such as crude oil, while demand for basic commodities such as petrol and food will remain steady as pressure on consumer finances grows.
But raising the Fed’s interest rates could have a much more immediate impact on discretionary spending, potentially ending a boom in demand for metals in areas such as real estate, car production and durables. And as manufacturers face rising borrowing costs, there are also growing risks to demand in areas such as construction and industrial machinery, which are a major part of overall use.
Evidence of the bearish change in sentiment is most evident in the Chinese market, where open interest in copper exchange contracts on the Shanghai Futures Exchange rose sharply during a sharp drop in prices. This signals that traders are adding new shorts instead of selling from ascending positions. On the LME, stock market data shows that the recent decline has been caused more by investors who are abandoning betting on rising prices, while bearish positioning is generally stable for most of the month.
This may reflect fluctuations in betting against the market at a time when stockpiles remain close to critically low levels, after the sharp decline in stocks helped a historic jump in spot copper prices at the end of last year. Nickel bears came under even more short-lived tensions in March as a new supply crisis erupted in the zinc market after LME’s easily accessible stocks fell to record lows last week.
For now, recessionary risks around copper are repelling broad investors, said Fu from BOCI.
“Some of the so-called tourists have decided that they want to get out for now and in terms of trade that makes sense – but in essence these markets are still very narrow.
(By Mark Burton, with the help of Jack Farchie)
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