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Traders are betting on a tighter copper market in coming months as disappointment over China’s faltering economic growth is overtaken by fears of a squeeze on global supplies.
Copper – a key barometer of global economic health given its use in every sector from buildings to power lines – costs $8,832 a ton for June delivery, $105 more than the spot price. According to Bloomberg data, the difference between current and future delivery is the largest ever recorded, in records dating back to 1994.
Analysts say the sharp gap reflects the current ample supply and fears the situation could change quickly.
Traders have revised down their expectations for China’s demand for the red metal after Beijing’s stimulus measures earlier this month failed to meet expectations. “The actual recovery 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 estimates China’s copper demand growth will slow to 3.9% this year, down from 6.7% last year.
Rising interest rates are another key factor behind the copper price difference as higher financing costs associated with physically storing the metal for traders encourage a shift towards longer-dated commodity futures.
But many traders are betting on supply shortages as production cuts by miners begin to take effect. Macquarie has revised down its copper supply forecast by 1 million tonnes for 2024 since last September.
Lower production is likely to have a delayed ripple effect throughout the supply chain. Many copper smelters, which refine raw material into metal, have become loss-making as there are too many facilities struggling for a limited supply of raw material. Traders are betting that some will have to slow or halt production, reducing the supply of refined metal and resulting in higher prices in coming months.
Goldman Sachs predicted copper prices will reach $10,000 a ton by the end of the year due to robust Chinese demand and “continued supply-side shock.”
China’s copper smelters are working on a joint plan to reduce production to address raw material shortages. News of the rare move earlier this month sent the benchmark copper price above $9,000 per tonne.
The volatile rally was further fueled by speculative trading by hedge funds and others, who built net long positions in anticipation of a tighter market.
Daniel Hynes, senior commodities strategist at ANZ Research in Sydney, said the spot market had not yet felt the impact of tight concentrate supply due to large inventories built up ahead of China’s annual parliament meeting this March.
The market expected further stimulus measures from the meeting, which sets economic targets, so manufacturers stocked up for stronger growth. Now they are backpedaling on this.
“Clearly, Chinese growth expectations are also being scaled back,” Hynes said. “This has delayed potential inventory replenishment that we would normally see continue into the second quarter,” she said.
But some say the supply shortage will likely be felt as smelters start cutting production and falling interest rates boost demand in China and other parts of the world.
“Severe disruptions to mining supply point to a 700,000 tonne shortfall, and are expected to start filtering through to refined production,” Morgan Stanley said in a note, forecasting a copper price of $10,200 per tonne by the third quarter.