Copper price drops to six-month low as economic data from China disappoints

Copper fell below $8,000 a tonne for the first time in six months as investors cooled the outlook for a solid economic recovery in China this year.

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The metal fell by around seven percent this month amid disappointing economic data from the world’s biggest consumer, after the end of COVID-19 restrictions in China caused a surge earlier in the year. Instead, weak domestic demand led Chinese mills to boost exports, helping to replenish stocks on the stock exchange.

Now speculators are placing bearish bets, marking a sharp turnaround since the first quarter when Trafigura Group Pte Ltd. and Goldman Sachs Group Inc. called for copper to hit a record high within a year. While the transition to green energy continues to support the long-term outlook for the lead metal, concerns about China dominate the market right now.

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Unlike previous slowdowns, Beijing is stripping the metals of its safety net without committing any major spending to infrastructure or real estate.

“Metals markets came under significant pressure after April’s disappointing macro data from China acted as a wake-up call to poor realities on the ground,” Citigroup Inc. said in a memo.

And while Asia’s biggest economy is a major source of copper’s troubles, there isn’t much help from the United States. The US Federal Reserve’s aggressive monetary tightening campaign has dampened demand, and recent comments from officials suggest the central bank may continue to raise interest rates.

Copper fell as much as two percent to $7,944 a tonne on the London Metal Exchange, the lowest since late November.

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Still optimistic

Goldman Sachs – a prominent bull in the copper market – said that commodity prices would “return sharply” if fears of a global recession prove unfounded. Copper will return to $10,000 a tonne this time next year, analysts including Nicholas Snowdon say.

For now, the key spread also signals that supply is far ahead of demand. Copper spot price fell $66 a tonne from three-month LME futures on May 23. This is the widest contango – when futures trade at a premium to the spot price – in data dating back to 1994.

This has helped as some of the challenges faced by key copper miners have eased. First Quantum Minerals Ltd. ended a month-long dispute with the Panamanian government in March, while China’s CMOC Group Ltd.’s massive copper stockpile in the Democratic Republic of the Congo is set to hit the market after a royalties dispute is put on hold.

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The risk of more copper supply adds to price pressure, said Jiang Hang, head of trading at Yonggang Resources Co. “Prices will be even lower.”

The improvement on the supply side is evident in LME stocks rebounding from multi-year lows in the first quarter.

Copper’s poor performance this year will disappoint investors who saw it as a clean way to bet on the energy transition. Metal is needed in everything from wind turbines to electric vehicles, and most analysts believe these new sources of demand will cause large deficits over the next decade.

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But timing the metal’s revival is no easy task given the unpredictability of the global economy since the pandemic. The metal is primarily an indicator of global growth.

“For people who buy long-term structural history, the way to play is to buy stocks, not options,” said Dwight Anderson, founder of Ospraie Management LLC.

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