Correction in the Copper Market?

Copper came under selling pressure yesterday in the early London session following a statement from a top banking regulator in China warning retail investors to avoid speculation in financial derivatives, including commodities and gold. ​

​This follows on from repeated warnings coming out of China from officals talking about high commodity prices after surging producer inflation strengthened China’s resolve to keep commodity prices in check.

On Wednesday, China’s state planner renewed its pledge to step up monitoring of commodity prices and strengthen supervision of spot and futures markets, as domestic producer inflation hit its highest in more than 12 years. Indeed speculation continues about the potential for the China State Reserve Bureau (SRB) to release stock. At this point, they are essentially trying to talk the market down.

This strategy could be working as some investors are becoming cautious and with unconfirmed talk of the SRB releasing copper, aluminium, and zinc stocks at the end of each month and we could see a steeper correction in the copper market over the coming weeks. Indeed, on the Thursday this week, the 3-month copper on the London Metal Exchange fell 0.6% to $9,920 a tonne early in the morning, while the most-traded July copper contract on the Shanghai Futures Exchange dipped 0.5% to 71,290 yuan ($11,167.15) a tonne.

But copper prices have had a good run this surging by 28% on the LME and 21% on ShFE. Last month, both contracts hit record highs and looking very overbought on the charts. Therefore, a correction is quite likely at these levels and talk from China about price controls and rumours of releasing stock from the SRB will serve as  a catalyst for the correction and we could see significant long liquidation.

Inflation Narrative

In addition, there is the narrative around US inflation and the market is awaiting the latest figures due out later on Thursday for clues the Fed's position on tapering. If there are any signals of tapering or even thinking about talking about tapering, then this could dampen demand for copper and metals in general.

Developments in Peru

The markets have also been focused on the Peruvian election results. If Castillo wins, this could add to the risk premium for long term copper mine supply. This is a long term narrative that mine investments may fall short of the expected surge in demand. 

Chinese Imports

The customs dat on Monday showed that China’s copper imports fell 8% in May from the previous month, as record-high prices dampened demand from the world's largest importer and consumer of copper. Imports of unwrought copper and copper products came in at 445,725 tonnes in May. That was down from 484,890 tonnes in April for a second straight month-on-month drop but up from 436,030 tonnes in May 2020.

Growth in China’s manufacturing sector, a key copper consuming sector, slowed slightly in May as raw materials costs rose at their fastest pace in over a decade. If we look at the  Yangshan copper premium SMM-CUYP-CN, paid on top of London prices for delivery of physical copper into China, we see that it is at its lowest since 2016 at $28 a tonne. This just confirms the lower buying interst in China at this time. The record high copper prices hare causing some buyers in China to sit on the sidelines and manufacturers are reportedly trimming down operations. The increasing gap between Chinese PPI and CPI  implies to some degree that many manufacturers stuck in the middle are absorbing the higher costs and this will dampen  any appetite for stockpiling.

By the end of May, the copper inventories in Shanghai bonded warehouses SMM-CUR-BON increased to 415,500 tonnes, which is the most the most since July 2019. Continued high prices are are likely to have an impact on future imports, however, even with the monthly declines, overall import levels are still relatively high.

In Summary 

The market is getting cautious about China retreating in its copper purchases, but the recent weakness in prices has been seen across the industrial metals complex. Much of the market gyrations we have seen in recent markets closely track the broader macro market activities. There have been rising speculations on Fed tapering, and any signalling of the earlier tapering than expected will cauase the US dollar to rally, which will also have an impact on copper prices and commodities in general causing more downside pressure.