A near 9-per-cent drop in copper prices in the last two days reflects a return to reality for a market whose recent surge to record highs had run ahead of fundamentals, analysts said – with more losses likely.
Weak demand, rising stockpiles, and the likelihood of higher supplies all suggested copper’s rally to record highs at US$14,527.50 a metric ton last Thursday was unsustainable, they say.
Prices had moved way beyond fundamentals, “pushed up by investors crowding into the market,” said Macquarie analyst Alice Fox. “We think the market was in an around 600,000 ton global surplus last year.”
Fox said copper prices are still too high, and that to fully reflect fundamentals, they should be below US$11,000 a ton.
At last week’s record, prices of the metal used to make wiring for conducting electricity were well above the level analysts say is needed to incentivise investment in new production in the coming years.
On Monday, prices hit a three-week low at US$12,414.50, a drop of 9 per cent in the two most recent trading sessions, with investors retreating after U.S. President Donald Trump’s appointment of Kevin Warsh as the next chair of the Federal Reserve pushed up the dollar higher.
The macro picture also undermines the case for copper bulls. Trump’s tariffs and trade wars have pressured manufacturing activity around the world over the past year.
Factory activity in some parts of the world expanded in January, offering policymakers some assurance the hit from higher U.S. tariffs has run its course for now, but the growth was from a low base and followed months of shrinking activity.
China’s Lunar New Year holiday in mid-February will also bring industrial activity to a standstill in the country which consumes more than half of global copper production estimated at around 26 million tons this year.
Much of the gain in copper prices last year was due to disruptions to mined supplies, including accidents in Indonesia and Chile. However, production ramp-ups at mines in Zambia and Mongolia are likely to mean higher supplies this year.
“While we forecast copper in a deeper deficit market year on year, we still do not see the market as historically out of balance,” said StoneX analyst Natalie Scott-Gray.
“And although supply risks do outweigh a demand slowdown… fundamentals certainly do not support copper at current levels.”
Another sign of weak demand are brimming stocks in London Metal Exchange, Shanghai Futures Exchange and Comex registered warehouses, which at more than 930,000 tons combined have more than doubled since August.
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