Copper MMI: Deep Market Contango, Index Moves Sideways

Copper prices saw a 1.90% increase during the final month of the year. By late December, this managed to bring them to their highest level since August, leading to mixed copper price forecasts for 2024. However, prices began to retrace from their 5-month peak by the start of 2024. By mid-January, they remained trapped within their long-term sideways trend (get weekly updates on copper market fluctuations with MetalMiner’s weekly newsletter).

Overall, the Copper Monthly Metals Index (MMI) moved sideways, with a 1.34% increase from December to January.

Deepest Copper Market Contango in Decades

As copper prices continue to trade sideways, the market sits within its deepest contango since the early 1990s. Indeed, the LME primary cash copper price fell to a $109.50/mt discount to futures prices at the beginning of 2024. While the delta narrowed slightly in the following weeks, it remained above the $100/mt mark by mid-January.

The deep contango suggests an oversupplied spot market. This seems to contrast with the 51,000-ton supply deficit estimated by the International Copper Study Group during the first ten months of 2023. Additionally, mine supply disruptions continue to fuel concerns over long-term supply, affecting the overall copper price forecast for the year. Such disruptions include the ongoing closure of Cobre Panama, which impacts roughly 1% of global copper output.

Despite news of supply constraints, exchange inventory levels remain robust. And although inventory levels offer a negligible correlation to copper prices, the strong rebuild of the LME throughout the second half of the year suggests current demand remains muted. While they saw a modest draw-down since late December, LME inventories remain near their highest levels seen since May 2022. 

Copper Prices Follow U.S. Dollar Index Sideways

Amid the deep contango, copper prices have yet to break out of their sideways trend. Meanwhile, the U.S. dollar index likewise remains consolidated. From December into January, markets appeared increasingly expectant of a dovish pivot by the Fed in late 2024, mainly due to cooling inflation. This saw the U.S. dollar index, which trades inversely to commodity prices like copper, trend lower throughout Q4 2023.

However, officials later tempered market hopes as to how soon those Fed rate cuts would come. Furthermore, Federal Governor Christopher Waller noted that inflation sits “within striking distance” of the Fed’s goal of 2%. However, Waller also emphasized his support of a careful approach to the eventual pivot.

Waller noted in an online discussion, “The key thing is the economy is doing well. It is giving us the flexibility to move carefully and methodically. We can see how the data comes in, see if progress is being sustained.” Waller expressed concern that a rushed pivot could see inflation rebound, stating, “The worst thing we’d have is it all to reverse after we’ve already started to cut.” As we move into 2024, analysts will have to continue adjusting their copper price forecasts based on the latest information.

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Interest Rate Traders Scale Back Pivot Bets, Copper Price Forecast Still Positive

Comments like Waller’s have led to markets unwinding bets as to when the Fed’s next rate cuts will occur. This, in turn, supported the short-term rebound in the U.S. dollar index. According to the CME’s FedWatch tool, markets overwhelmingly expect no change in the Federal Funds rate at the Fed’s upcoming January meeting. Meanwhile, bets by interest rate traders that there will be a rate cut in March fell from 76.9% on January 12 to 65.2% today.

As moves by the Fed continue to cue the direction of the U.S. dollar index, this will likely prevent a meaningful breakout to the upside or downside for short-term copper prices. However, should inflation continue to trend lower in the coming months and economic data support a dovish pivot, it could offer enough momentum for both the U.S. dollar index and copper prices to establish a new trend.

For copper, rate cuts will likely see prices trend higher, which appears in line with current market expectations. According to the LME’s most recent Commitment of Traders Report, investment funds, whose large positions hold disproportionate sway to market direction, remained net long as of January 16. 

Biggest Copper Price Moves

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• Japanese primary cash copper prices saw the largest, albeit modest, increase of the overall index, with a 3.09% increase to $8,797 per metric ton.
• LME primary three month copper prices rose 1.9% to $8,580 per metric ton.
• U.S. producer prices for copper grade 102 increased by 1.36% to $5.21 per pound.
• Meanwhile, Chinese primary cash copper prices edged lower, with a 0.29% decline to $9,750 per metric ton.
• Korean copper strip prices saw the largest decline of the overall index, falling 1.05% to $10.28 per kilogram.