Have Copper Prices Peaked? Was the Recent Spike Mere Speculation?

Copper has had a phenomenal run the last few weeks.

After being range-bound in the mid $4,000’s per metric ton for much of the summer, the runaway price caught many by surprise at the turn of the month, rising dramatically to peak at over $5,500/mt on the London Metal Exchange before easing back this week.

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Many have put the surprise win of President-elect Donald Trump as the cause of Copper’s strength, but in reality the rise started before the date of the presidential election.

The result was more correlating than causal. Certainly, the president-to-be’s campaign pledges of a massive infrastructure program have been supportive of prices in the same way that the resulting expected debt increase has been damaging for bonds, but it wasn’t what kicked it off.

No, the recent rising copper price had much less to do with the prospects for Donald Trump’s election and much more to do with perceived demand in China. Price rises have unquestionably been speculatively fueled. Turnover on the LME has been at record levels recently, a development mimicked by the Shanghai Futures Exchange. Ironically, although PMI figures in China remain robust, refined copper imports have been falling although concentrate import volumes have held up well.

Codelco, the world’s largest copper miner, has just confirmed the lowest delivery premiums to the Chinese market on recent record, supporting comments made by Chilean miners that concentrate supply remains plentiful and will continue to outstrip demand next year. Speculators, however, were having none of that, possibly supported by algorithm trading and abetted by short sellers scrambling to cover positions, the copper price has powered upward making gains of some 20% this month.

But speculative price increases of this sort rarely if ever go on for long. When investors see the opportunity to take profit, unless the fundamentals are overwhelmingly positive, the bull run stops and prices ease back.

This year’s stimulus measures in China are expected to wane by Q2 of 2017. Additional announced spending on construction and infrastructure in China, if supported by continued robust factory output, may limit the downside and encourage a period of consolidation between $5,000 and $5,400 per mt before a new trend emerges but when that will be, or what the direction, is too early to call.

As for the new president’s infrastructure plans, he still has to get those past Congress and the Senate, who, although Republican, may not be universally supportive of the new leader. It’s unlikely any meaningful stimulus resulting from infrastructure investment will impact demand much before 2018.

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In addition, another of the new president’s campaign pledges should be borne in mind. Trump will likely have no intention of American tax dollars being spent on foreign steel or raw materials. He is likely to be much more effective than any previous president in ensuring that spending of this kind is contained behind a Buy America requirement, limiting the impact on global markets. Nevertheless, more robust American growth would certainly drive positive sentiment even if the impact on global supply and demand was not as significant as it would once have been. 2017 promises to be an interesting year.

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