Source: sucdenfinancial.com
By: Daria Efanova & Viktoria Kuszak
Key points
- China’s stimulus announcements have been key in driving copper prices in recent months.
- CTAs have had the biggest influence on copper sentiment, a trend we expect to hold for Q4 2024.
- Given continued concentrate shortages and the possibility of further announcements from China, we see little downside for the market below the $9,400/t level..
Copper has experienced fluctuations in recent months, with a notable increase prompted by the release of Chinese stimulus measures, pushing prices to breach the $10,000/t level in September. However, this momentum was short-lived, as follow-up announcements from the Finance Ministry failed to bring more concrete measures targeting the construction industry. From a longer-term perspective, market sentiment has already priced in the region’s subdued growth, meaning that subsequent announcements are unlikely to spark longer-term revival in the construction sector. This is weighing on market performance.
In line with the rest of the complex, the copper market has been notably influenced by developments in China. This focus has led to a growing disconnection with the broader fundamental and macroeconomic trends outside of China. Interestingly, the historically observed inverse relationship between the dollar and copper prices has been weakening. This suggests that traditional indicators are losing their predictive power over copper prices. Instead, the momentum for copper recently seems to be driven more by CTAs, a trend we expect to hold for Q4 2024. Likewise, from the physical side, an unexpected squeeze in May caught many suppliers by surprise, making participants wary of committing to larger short positions. We believe many physical players will stay on the sidelines, selling moderately into high prices.
LME and COMEX Investment Side COT Net Positioning
LME and COMEX performance continued to align as copper is influenced by developments in China.
From the fundamental perspective, the concentrate supply remains tight. TCs have fallen drastically, reflecting this, reaching new lows of $7.50/mt, way below the $80/mt benchmark set for 2024. While this situation puts pressure on some smelters, we do not believe this will be an immediate concern for the rest of this year. Many of China’s major smelters have long-term contracts that ensure steady concentrate supply at higher TC/RCs based on the 2024 benchmarks. This has helped cushion them against the severe drop in spot TCs this year, ensuring relatively high operating rates and enabling refined copper production to grow by 7% in the first half of 2024.
The situation is likely to change in 2025. There is a growing trend in China where suppliers are considering cuts to smelting operations to keep prices high and expand profit margins. This strategy, combined with the anticipated lower TCs for 2025, suggests that numerous closures might occur next year. Further curtailments seem more probable, with the projected shortfall in concentrate supply not meeting the 1.1m tonnes mark.
This situation supports the metal; however, it is insufficient to suggest a longer-term upside trend. The reason for this is that the production of refined materials has remained largely unchanged. To offset domestic shortfalls, China has increased its imports of copper concentrates from other regions, especially Africa and Latin America. Refined metals are mostly in oversupply, which has weighed on prices this year, challenging bullish forecasts. However, we advise caution regarding any announcements of smelter cuts in Q4 2024.
Q4 Outlook:
Overall, the copper narrative will likely remain dominated by the China story. Given a combination of continued concentrate shortages and the possibility of further announcements from China, we see little downside for the market, with support at $9,450/t holding firmly. Any upside will likely materialise in short-term volatility spikes, with mean-reversion strategies likely to follow suit, keeping the metal within the longer-term range in the coming months. We see robust resistance levels at $10,000/t and $10,200/t, respectively.
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