- Copper prices are oscillating sideways within an extended sideways-to-slightly-higher channel, with prices trading either side of the 20 DMA.
- The stochastics have turned lower but are not showing too much weakness so we expect more sideways trading.
- The long-term chart (inset) suggests prices have only just started to rally. The May 2015 peak at $6,481 per tonne seems a likely target if and when the March peak is overcome. The current channel may turn out to be a continuation pattern.
- Although we remain quietly bullish for the medium- and longer-term outlooks, prices could fall further because there is room on the downside within the channel for prices to drop to $5,556 per tonne, with other support at $5,652 and $5,420.
The overall mood at Metal Bulletin’s copper conference in Leipzig, Germany, seems to have been that perhaps prices are slightly elevated given the gains seen already, the stock rises, ample availability of copper cathodes and lower premiums but a move towards larger deficits should underpin prices later in the year. Our own view is a bit more bullish in that we see the recent run-up in LME stocks as being part of a trade rather than reflecting fundamentals per se. As well, we are a bit more bullish on the economic outlook and the restocking it may lead to, especially heading towards the second quarter.
LME stock inflow has slowed, with only 1,700 tonnes being delivered into LME-sheds over the past six days, while outflow this week has averaged 5,858 tpd compared with 2,963 tpd so far in March and 4,008 tpd in February. As the second quarter nears, we are waiting to see if exchange stocks start to fall. Cancelled warrants on the LME stand at 142,100 tonnes, up from a low of 84,850 tonnes on February 23, so it does look as though the outflow could pick up.
Money managers trading copper on the LME do not seem that active; the gross short position is still low while the gross long position at 125,216 lots is already down from its earlier peak of 156,117 lots. The relatively small gross short position of 65,181 lots is near the lowest we have on record at 56,061 contracts, which suggests there is not much bearishness around (see chart).
The cash/three-months spread is weaker at $27.75-23.75 per tonne contango, which suggests no increase in short-covering, so the recent buying may be fresh buying. The rebound in prices, however, appears to be attracting some forward lending, which would indicate forward buying. The forward spreads have weakened, with the 3/27-month spread at $28c, out from an average of $10.75c last week.
Other LME data shows a pick-up in the concentration of warrant holdings, with one large holder of LME warrants at 40-49%.
The overall outlook for copper seems mildly bullish but there is concern about the high level of copper cathodes stocks, which should be able to delay any impact of concentrate shortages. So there does not seem to be any need for consumers to chase prices higher; indeed, they have not been doing so as seen by sideways-trading prices and flat physical premiums. Prices may remain sideways until concentrate shortages lead to tightness in the refined market and a drawdown in exchange stocks.