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Copper prices have taken a terrible beating over the past week, plunging $600/tonne to four-year lows around $6,500/tonne in the space of just a few days. What does this say about the outlook for copper? And, as the bellwether for the base metals complex, what does it say about the broader outlook for the whole group?
For a long while, sentiment in copper has been supported by falling London Metal Exchange (LME) stocks. They fell from 680,000 tonnes in June last year to under 255,000 tonnes last week, with half of the remainder already earmarked for removal. But there is a lot more to the global inventory picture than the LME, and it seems the market has now cottoned on to the much less constructive themes that have been evolving for some time in the more opaque world of Chinese metal warehousing.
By our estimates, unreported copper stocks in bonded warehouses in China have been rising fast on the back of the popularity of the import financing trade. The total has at least doubled since bottoming out in August last year around 350,000 tonnes. Shanghai Futures Exchange (SHFE) stocks have also been on the rise this year, physical premiums have come down and import losses have been widening now that the SHFE-LME arbitrage window has closed and the currency has weakened. But these trends have been in place for a few months, so why the steep sell-off in copper prices now?
The move coincided with China’s first corporate bond default last week. While this is unrelated to copper directly, the concern is that funds raised from copper financing are ending up in bad investments like this and could result in deals being unwound, especially in light of the weaker yuan lately.
So, instead of Chinese bonded warehouses hoovering up excess copper units in the global market, there is suddenly the real possibility that the flow will reverse and the metal will come flooding back out.
We had already been forecasting a retreat in copper prices after a relatively strong start to the year. We saw LME cash averaging $7,220/tonne in Q1 and $7,000/tonne in Q2 of CY2014. The market was on track up until last week but the steep sell-off now makes our outlook appear a little bullish. That said, we think this move down feels overdone and could turn into a spike, especially if consumer (and potentially strategic) buying emerges at these low levels.
Unusually, the other base metals have not followed copper off the cliff. They’re largely doing their own thing, reflecting their increasingly varied fundamentals.
Nickel has been the strongest performer in recent weeks, as the market has started to price in the implications of Indonesia’s ban on ore exports. This ban is affecting bauxite too, and is a supportive element in the aluminium market. Both are heavily oversupplied, but the outlook is for their supply demand balances to tighten. We forecast prices in both markets stepping higher gradually this year, though we would argue nickel has run ahead of itself in the short term and needs to consolidate back below $15,000/tonne. It could follow zinc’s path, which retreated sharply after an excessive run-up recently too. Through the volatility, we look for higher average prices in both metals in Q2 versus Q1. The same is true for lead and tin, and although the former is looking weaker lately, the fundamentals will turn around as the year progresses. Tin remains the structurally tightest market, due to supply constraints but we are wary about being too bullish as we wonder how much of the story is already priced in.
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The author is senior metals analyst, Metal Bulletin Research
