Carsten Menke, Commodities Research Analyst, Julius Baer
Shrugging off souring sentiment in financial markets, softening leading indicators as well as rising inventories, copper prices held up well as of late and moved back towards the upper end of their trading range. That said, there are no signs of tightness in the market, in particular as some of the supply risks are receding. First, wage negotiations in Chile, the world’s largest copper producer, are progressing much more smoothly than expected, with about half of the key mines settled.
Negotiations at Escondida, the world’s biggest mine, are ongoing but seemingly not progressing. Following last year’s strike, this may have caused some unease in the copper market this week. Adding to that, production at the world’s second biggest mine, Grasberg in Indonesia, struggled during the first quarter. Yet we believe mine production should grow solidly this year.
Second, China’s imports of copper scrap seem to be improving after the country’s ban on lower qualities had been put in place this year. While the ban’s impact had been more material than initially expected, contained copper volumes dropped only slightly in March as the implied copper content surged. We still believe that over time lower-quality scrap will be upgraded outside China to make it eligible for importers. While these supply risks need to be watched, we believe fears of undersupply are overdone.
We still see copper detached from fundamentally justified levels and expect prices to move lower over the coming months. Hence, we stick to our bearish view and our short position in June 2018 copper futures, targeting $6,500 per tonne.
As prices are moving back towards the upper end of their trading range, copper is shrugging off rising inventories and receding supply risks. We still see the market well supplied and believe prices are detached from fundamentally justified levels. We stick to our bearish view and our short position in June 2018 copper futures.