Deteriorating fundamentals, economic conditions to weigh on copper prices

SHANGHAI, Oct 24 (SMM) – The rally in Shanghai copper prices is likely to be short-lived, with downside risks seen in view of a new Brexit delay and lingering concerns about the world economy.

Copper prices will also be subdued by deteriorating fundamentals. The Chinese copper cathode market is set to be well-supplied in October, with potentially greater inflows of imported materials and an estimated 2.5% increase in domestic production.

Meanwhile, copper consumption is unlikely to pick up this month, as the latest SMM survey showed a dip in the operating rates across copper downstream processors.

Copper prices strengthened this week, with the most active contract on the Shanghai Futures Exchange hitting a more than one-month high of 47,490 yuan/mt overnight.

This came despite higher inventories, with copper stocks across SHFE-approved warehouses seeing a combined increase of over 34,000 mt in the two weeks after the National Day holiday, bolstered by the ramp-up of newly-commissioned smelting capacity in China and inflows of seaborne materials amid resurfacing import arbitrage opportunities.

In spite of higher prices of futures and inventories, spot copper premiums held firm, with SMM assessments showing that the premium for Shanghai spot trades over the SHFE 1911 contract stood at 30-80 yuan/mt as of Wednesday October 23.

Market euphoria after UK Prime Minster Boris Johnson returned from Brussels with a renegotiated Brexit deal last week, coupled with a weaker US dollar, probably contributed to this week’s copper rally.

The greenback now resides around two-month lows against a basket of its rivals, on growing expectations that the US Federal Reserve will cut interest rates for the third time this year at the meeting at the end of this month.  

Copper prices managed to dodge a hit from higher inventories as falling inventories in Shanghai bonded areas offset the gain in SHFE inventories, keeping overall stocks low. Shanghai bonded copper stocks came in at 256,000 mt as of October 18, more than halved from a peak of 588,000 mt at the end of April, showed SMM data.

Worries about raw materials supply also supported copper prices, with protests intensifying in top copper producer Chile and China scaling back import quotas for copper scrap.

China issued a fresh batch of import quotas for newly-restricted high-grade copper scrap last week, accounting for only 17% of those for the third quarter for scrap users on average.