"Dr. Copper" Shines No More: Bear Market in 2 Months
On July 22nd, the London copper futures market experienced a significant downturn, with prices briefly dipping below 9,200 USD per ton, marking a nearly four-month low. This dramatic shift in the market sentiment strikes a stark contrast to the optimism and bullish outlook that characterized the first half of the year.
At the heart of this decline lies a pervasive issue of high inventory levels, which loom over the market like a dark cloud. Investors currently find themselves in a state of cautious observation, particularly regarding the Federal Reserve's policy decisions that threaten to influence economic recovery and the growth trajectory of the renewable energy sector.
The persistent pressure of inventory is undeniably impacting market dynamics. Copper, often regarded as a key barometer for global economic health, reflects the underlying demand trends in its price movements. Since hitting a historic peak of 11,104 USD per ton on May 20th, London copper has entered a bearish phase, characterized by an approximately 8% drop within the last two weeks alone. Market data indicates that during this same timeframe, copper futures traded on the New York Mercantile Exchange faced an almost 19% decline, inching perilously close to bear market territory.
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Analysts have pointed towards an upward trend in copper inventories across key exchanges, including the London Metal Exchange (LME), the Comex in New York, and the Shanghai Futures Exchange. This influx of stock is indicative of waning demand, shedding light on an overall market that is struggling to maintain momentum.
Ole Hansen, the head of commodity strategy at Saxo Bank in Denmark, emphasized in a recent report how the ongoing rise in copper inventories presents a challenging environment for market players. It’s noteworthy that, for the first time since August 2021, global copper stockpiles registered across the three major exchanges have surpassed 500,000 metric tons. Reconciling this with overall economic sentiments paints a grim picture.
Ewa Manthey, a commodity analyst at ING in the Netherlands, echoed similar sentiments, stating that the market is eagerly seeking avenues to bolster demand. She articulates a sobering forecast, suggesting that without substantial stimulus measures from major consuming nations, hopes for a short-term recovery appear bleak. In this context, both copper and other industrial metals may witness further price declines, closely reflecting the frail demand outlook.
Joe Maher, an assistant economist at Capital Economics, also weighed in on the current supply-demand dynamics. According to Maher, the existing fundamentals of copper substantiate the prior price surges, yet they fail to fully account for the substantial nearly 20% rise in value. As market exuberance wanes, Maher expects copper prices to decline by approximately 10% by year’s end, reflecting a more grounded market perspective.
Hansen also indicated that there remains a degree of uncertainty regarding the duration of copper's current price adjustment phase. With futures prices now having breached the critical technical support level of 9,500 USD per ton, a further decline could see the market testing the psychological threshold of 9,100 USD per ton.
Amidst these challenges, it’s essential to note that China's demand for copper has shown signs of stabilization in recent weeks. The premium for imported copper has reverted to a modest 3 USD per ton, a sharp recovery from the 15 USD per ton discount observed in May. Compounding this, the People’s Bank of China recently implemented interest rate cuts aimed at stimulating economic growth, which may help alleviate some pressure on copper demand.
Simultaneously, signs are emerging that the Federal Reserve may be gearing up for a rate cut of its own as inflationary pressures begin to ease. Market participants are now awaiting crucial economic indicators, including the release of the second-quarter Gross Domestic Product (GDP) figures on July 25th and the Personal Consumption Expenditures data on July 26th. According to the Chicago Mercantile Exchange’s FedWatch Tool, traders have fully priced in a 25 basis point rate cut by the Fed in September.
While anticipation mounts, questions linger regarding the Fed’s next moves. Several officials have highlighted the necessity for additional data to bolster confidence, yet they have been vague regarding the thresholds or criteria that would dictate continued rate cuts. Given this backdrop of cooling economic indicators, several institutions have begun to express skepticism about whether the Fed might be waiting too long to respond. The high rates instituted to curb inflation could pose risks to the economy, potentially staving off growth and leading to a downturn if not carefully managed.
Adding to the complexity, the European Central Bank, already in a rate-cutting phase, acknowledged during its last meeting the significant challenges posed by a cooling economy and sluggish recovery. Coupled with recent manufacturing PMI and industrial output data from both Europe and the U.S., the road to demand recovery appears increasingly fraught with difficulties.
Moreover, amidst these economic discussions, geopolitical factors cannot be overlooked. Speeches delivered at the recent Republican National Convention in Milwaukee reaffirmed commitments to curbing inflation through increased domestic fossil fuel production. This stance has had tangible repercussions, prompting a pullback in the clean energy sector while revitalizing traditional energy stocks. In just two weeks, giants like ExxonMobil, Chevron, and Occidental Petroleum have seen their share prices climb by nearly 9%. In stark contrast, clean energy firms such as Solaredge, Canadian Solar, and Vestas have faced substantial declines, with some experiencing drops approaching 10%. Such fluctuations have prompted several investment firms to urgently downgrade their ratings.
Interestingly, the manufacturing trajectory of electric vehicles (EVs) faces a direct relationship with copper usage, as the material's requirements in each vehicle is nearly four times that of traditional internal combustion engine vehicles. Incentives promoted by Democrats, such as tax credits for EVs, have aimed to fuel adoption, while the Environmental Protection Agency has introduced new emissions regulations to guide the transition to greener vehicles. In contrast, former President Trump has publicly denounced electric vehicles, suggesting they pose a threat to American jobs and pledging to revoke the emissions guidelines if he regains office.