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Traders are betting on a tighter copper market in the coming months, as disappointment over faltering economic growth in China is outweighed by concerns about pressure on global supplies.
Copper – a key measure of global economic health given its use in everything from buildings to power lines – for June delivery is $8,832 a tonne, $105 more expensive than the spot price. The difference between current and future deliveries is the largest ever, in records dating back to 1994, according to Bloomberg data.
Analysts say the large gap reflects the current abundance of supply and fear that the situation will change quickly.
Traders lowered their expectations for demand from China for the red metal, after the stimulus measures taken by Beijing earlier this month fell short of expectations. “Actual recovery is in [consumer] Demand is not as strong as expected, said Zhang Jiefu, senior analyst at Wuhan-based Zhengxin Futures. “Buying is very cautious at the moment.”
Macquarie expects Chinese copper demand growth this year to slow to 3.9 percent, down from 6.7 percent last year.
Rising interest rates are another major factor behind the differential in the price of copper, as higher financing costs associated with physically storing the metal for traders encourage a move towards longer-term commodity futures.
But many traders are betting on supply shortages as production cuts by miners take effect. Macquarie has revised down its copper supply forecast by 1 million tonnes for 2024 since last September.
The decline in production is likely to have a ripple effect across the supply chain. Many copper smelters, which refine raw materials into metal, are running at losses as there are too many facilities battling over shortages of raw materials. Traders are betting that some will be forced to slow or halt production, tightening the supply of the refined metal and translating into higher prices in the coming months.
Goldman Sachs expects copper prices to reach $10,000 per ton by the end of the year due to strong Chinese demand and a “persistent supply-side shock.”
Chinese copper smelters are working on a joint plan to reduce production to meet the shortage of raw materials. News of the rare move earlier this month sent the benchmark copper price above $9,000 per ton.
The volatile rally was further fueled by speculative trading by hedge funds and others, which built long-term positions in anticipation of the market tightening.
Daniel Haynes, chief commodities strategist at ANZ Research in Sydney, said the spot market had yet to feel the impact of the shortfall in concentrate supply due to ample inventories built up ahead of China's annual meeting of its rubber parliament next March.
The market was anticipating more stimulus measures from the meeting, which sets economic targets, so producers were stockpiling for stronger growth. And now they are backing down.
“It is clear that expectations for Chinese growth are being reset as well,” Heinz said. “This has delayed the potential restocking that we would normally see during the second quarter,” he said.
But some say the supply shortage is likely to rear its head soon as smelters start cutting production and lower interest rates lift demand in China and other parts of the world.
“High mine supply disruptions suggest a shortfall of 700,000 tons, and should begin to impact refined production as well,” Morgan Stanley said in a note, forecasting the copper price to reach $10,200 per ton by the third quarter.
