In recent days, copper prices have managed to break previous highs after several weeks of retreat. Prices managed to hit short-term demand zones, which usually trigger bullish strength. This confirmed the recently formed uptrend in the copper market, ending the macro downtrend that started earlier in 2022. The new data points to the beginning of a bull market, increasing the potential for further upward price movement. However, buyers should not rule out a pullback, as prices remain historically high.
Overall, the Monthly Copper Metal Index (MMI) increased by 3.19% from December to January.
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Chinese speculation is driving the copper market higher
During November, the lifting of China’s zero-covid-19 policy sent copper prices up over 3% for the first time since March. However, the copper market began to move sideways again in December as rising contagion rates continued to disrupt economic activity. Now, as major cities approach and pass their COVID peaks, copper prices seem decidedly bullish again.
Although Chinese demand has not necessarily “recovered”, markets are looking optimistic. In recent Financial Times in the article, Caroline Bain, commodity economist at Capital Economics, noted “we expect a rapid recovery in the Chinese economy.” Bain is not alone in her sentiment. Already during the first two weeks of the year, copper prices jumped over 7%. This brings them to their highest level since June.
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Lack of risk: rural towns Next, the construction sector remains weak
Although the numbers appear to have peaked in some areas, China’s latest wave of COVID is far from over. Zeng Guang, a former chief epidemiologist at China’s Centers for Disease Control and Prevention, warned: “Our priority was on big cities. It is time to focus on rural areas.” This could indicate that China is still two to three months away from its domestic peak. Of course, recovery in major cities will have a greater impact on markets than in rural areas. Still, that means we won’t see the true volume of China’s post-Null COVID-19 demand until Q2. That’s more than enough time for markets to potentially over-speculate. Furthermore, overall uncertainty regarding China’s recovery and the ongoing threat of disruptions related to COVID will increase the likelihood of instability.
The Copper Market: Future Issues Awaiting China
When China finally finds itself on the other side of the pandemic, many other problems await it. For one thing, the construction sector remains weak amid the ongoing property crisis. Of course, China has made constant efforts to support this sector. The most recent was the move away from the “three red lines” policy. The change helped ease debt restrictions for developers, but the industry remains in decline. The fourth quarter of 2022 marked the sixth consecutive quarter of annual decline in home sales.
According to the China Construction Machinery Association, sales of excavators in China, which represent a substitute for the construction industry, saw a 23.8% decline. China’s aging population will add another layer of difficulty to the recovery as many wonder who is left to build for in the future? The construction industry has historically served as one of the largest consumers of China’s overall copper demand. If the decline continues and demand experiences a limited recovery, it could cause a strong pullback in the domestic copper market.
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US dollar falls as inflation slows
Meanwhile, the decline in the US dollar provided additional support to the copper market. In fact, the US dollar index, which has an inverse correlation with commodity prices, is now at its lowest point since June.
Also, slowing inflation continued to weigh on the US dollar index. While some had hoped for a more aggressive decline, the consumer price index fell 0.1% in December, marking the sixth consecutive month of decline. For markets, that likely means the Federal Reserve will continue on its current path after slowing the pace of rate hikes last month. The next FED meeting will be from January 31 to February 1. This could result in an even smaller increase after the 50 basis point increase in December. In a recent speech, Philadelphia Fed President Patrick Harker commented that “increases of 25 basis points will be appropriate going forward.”
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The biggest moves in the copper market
- India’s primary cash copper prices posted the biggest month-on-month gain, as prices rose 8.23% to $8.46 per kilogram since January 1.
- Korean copper strip prices rose 7.23% to $10.54 per kilogram.
- Primary three-month LME copper prices rose 4.4% to $8,400 per metric ton.
- Meanwhile, Japanese cash copper prices fell just 0.14% to $8,612 a metric ton.
- China’s primary cash copper prices also fell, falling 0.15% to $9,508 per metric ton.