Positive Macroeconomic Front And Weak Fundamentals Can Lead To Significant Volatility In Copper Prices

Copper prices edged down in May, and rebounded at the end of the month. Affected by the debt ceiling issue and the lingering bank liquidity risks in early May, the market’s risk aversion increased, weighing on risky assets such as copper prices. A combination of the deal reached by President Biden and Speaker Kevin McCarthy on the debt ceiling issue at end-May and the US Beige Book showing insignificant impact on the current economy from bank liquidity risks boosted market confidence.  Copper prices rebounded amid eased risk aversion. Notably, raising the debt ceiling is conducive to the stability of the financial market, but that may push up the US dollar and US Treasury securities in the short term. The Fed’s interest rate hike decision will remain the focus of markets in June. Various data indicated that the US economy is gradually slowing down and the Fed is expected to suspend interest rate hikes in June. Inflation data of major European economies slowed down in May.

As the largest economy in the eurozone, inflation in Germany slowed down sharply. The inflation data in Germany and many eurozone countries fell to the lowest in 15 months. The market believes that after the last rate hike in June, the interest rate is expected to have peaked. And the euro's restraint against the US dollar may weaken in the future. In China, the manufacturing PMI, non-manufacturing business activity index and comprehensive PMI output index in May were 48.8%, 54.5% and 52.9% respectively, 0.4 point, 1.9 points and 1.5 points lower than the previous month. The economic prosperity has declined, and both production and demand have slowed down. Domestic demand was weak. Many places in China issued real estate optimisation policies with wider a scope than in previous years. Market confidence was boosted. Meanwhile, many Chinese banks adjusted deposit interest rates to continuously improve liquidity for the market. Copper prices thus rose.

Fundamentally, suppliers of copper scrap refrained from selling against the sharp drop in copper futures prices in May, reducing copper scrap supply. On the other hand, disruptions to copper concentrate supply continued to weaken. The SMM Imported Copper Concentrate Index rose from 83.38 in April to 87.87. This ensured stable copper cathode supply. Meanwhile, the import window reopened in early May, driving inflows of imported copper. The overall domestic copper cathode supply was stable in May. On the consumption front, downstream buyers restocked aggressively when copper prices fell sharply, bolstering the weekly average operating rate of copper rod plants using copper cathode. However, after the prices rebounded at the end of the month, consumption weakened and new orders fell significantly.

In June, positive macroeconomic front and weak fundamentals can lead to significant volatility in copper prices. Risk aversion has eased thanks to improving global risks. Meanwhile, data released recently pointed to gradually slowing down of the US economy. The Fed is expected to pause interest rate hikes in June, and the US dollar is expected to fall further, pushing copper prices higher. Although domestic data showed weak endogenous power of domestic consumption, positive macroeconomic news will drive copper prices to rise. The most active SHFE copper contract prices are expected to move between 64,500-67,500/mt in June, and LME copper will trade between $8,000-8,550/mt.