Copper under pressure

By Wong Min Hao

A GLOOMY outlook for the global economy has dragged many commodity markets lower. This is particularly so for copper due to its broad applications across multiple sectors of the economy.

Central banks around the world have been tightening their monetary policies in order to tame persistently high inflation. The US Federal Reserve raised its benchmark federal funds rate during the June Federal Open Market Committee (FOMC) meeting by 75 basis points, the highest increase since 1994, in order to combat inflation that has hit a 40-year high in the US. In addition to this is also the expectation of another 75 basis point rate hike in July.

The aggressive tightening of monetary policies has threatened to slow down economic growth and trigger a possible recession, which will likely dampen the demand of copper due to a decline in industrial activity, causing copper prices to face downward pressure. Furthermore, as copper is mainly denominated in US dollar, the strengthening of the currency due to rate hikes has also dragged copper prices lower.

Lastly, a new wave of lockdowns in China, which has a zero Covid-19 policy, has sharply slowed economic activity in the country. As the world’s leading consumer of copper, making up half of global consumption, this has further affected copper prices.

Technical outlook

Copper prices (as seen by the most liquid month of Comex copper futures, the rolling first contract month) have been on an uptrend since mid-2020 and copper was seen to be trading in an elevated range for the past 15 months. However, recent bearish fundamentals have caused sentiment to turn, with the contract breaking to the downside of the range.

With fundamentals expected to remain bearish for the short term, this break into the downside could result in a new downtrend for copper prices. Should this trend continue, we could expect support to come in at US$ 3.4910/pound (low of Jan 28, 2021) and US$ 2.8345/pound (low of Oct 2, 2020).

On the other hand, we can expect an alternative scenario if inflation is successfully contained or if China lifts its restrictions due to improvement of its Covid-19 situation. This will likely cause market sentiment to improve and prices to rise. Should this happen, we can expect resistance to come in at US$ 4.5770/pound (high of June 3, 2020).

The writer is commodities manager at Phillip Nova