Copper plunges as investors cut bullish bets

Heavy selling in the metal markets dragged the commodity sector lower ahead of the key FOMC meeting. The ANZ China Commodity Index ended the session down 1.1%, with the industrial metals sector falling over 3%. Copper and nickel recorded the biggest falls. The agriculture sector was also down sharply, driven by losses in hogs, cotton and soybeans. Bulk commodities were largely unchanged, with iron ore futures trading in a tight range. Gold struggled stay above water amid mixed economic data. Crude oil and LNG gained, dragging the energy sector higher.

Copper prices plunged amid a wave of selling from investors as they cut their bullish bets ahead of the FOMC meeting. The market has become increasingly concerned that higher inflation and strong economic data could see the Fed start to pull back from economic stimulus. Sentiment wasn’t helped by weak economic data. Retail sales in the US fell more than expected in May, as consumers shifted spending to services. This was mitigated by a pick-up in US factory output, which grew by 0.9% last month. Signs of weakness in the physical copper market have also been emerging. Import premiums paid by Chinese buyers have fallen sharply in recent weeks, while inventories in LME warehouses in Asia have reached their highest level in almost a year.

The precious metals sector struggled as investors position for a possible shift in monetary policy from the Fed. Gold prices inched lower, with investor appetite crimped by a stronger US dollar and higher yields on US Treasuries. While the market isn’t expecting the Fed to start tapering its bond purchases at this meeting, it will be looking at the dot plot for any signals it may be thinking about raising interest rates in 2023 amid higher inflation and stronger economic growth. Platinum came under heavy selling as prices broke through the 50- and 100-day moving averages.

Concerns of tighter monetary conditions failed to dampen sentiment in the crude oil market. Signs of rising traffic in Europe and the US have raised hopes that the peak driving season will drive demand higher. This was reflected by the bullish views of participants at the FT Commodities Summit. Glencore’s Head of Oil Marketing, Alex Sana, said global demand should return to normal in the third quarter, while Vitol CEO, Russell Hardy, said diesel and petrochemical demand is already at pre-pandemic levels. A host of top commodity traders also said that USD100/bbl is a real possibility, as strong demand and supply constraints tighten the market. In fact, the issue of a lack of spending on new supply was a real talking point, as the transition to clean energy accelerates. Jeremy Weir, Chair of Trafigura, sighted a fall in reserves from 15 to 10 years, as well as capital expenditure down from USD400bn/y to only USD100bn as reasons for the supply constraints.

North Asian LNG prices traded near recent highs amid ongoing supply side issues in Australia. Traders were actively seeking spot cargo to cover short positions left vulnerable by production outages in Australia. Those outages include planned maintenance by Inpex at its Ichthys LNG export terminal. Separately, no cargo was exported from 7-26 May from the Darwin LNG facility. This comes amid strong demand from China. China’s power consumption rose 12.5% y/y in May to 672.4bn kwh, CCTV reported. This was also up 18.7% from May 2019. Nevertheless, the urgency did recede as the session went on. The JKM July futures were steady at USD10.924/mmbtu. Longer dated futures also struggled to hold recent gains, with the August future falling 1.8% to USD11.575/mmbtu.

Iron ore was mixed, with futures on the Dalian Exchange gaining nearly 0.5%, while they fell by 0.8% on the Singapore Exchange. This come ahead of some key economic data which may signal an easing in growth from the construction and manufacturing sectors.