Have the base metals bolted too soon?

Has copper run ahead of the fundamentals - Fastmarkets

The base metals have been running higher, but are the rallies justified, or have the metals’ prices been pushed higher ahead of the fundamentals? Running ahead of the fundamentals is something the futures markets can facilitate, but it only makes sense for traders to front run the fundamentals if indeed the fundamentals are going to catch-up in a timely manner.

The run up in copper has generally boosted sentiment across the base metals complex. At their highs so far this year, prices were up by an average of 26%, compared with where they started the year.

So this begs the question is copper’s rally really justified, or was it sparked by factors that on the surface looked bullish, but underneath are not really that constructive.

The short squeeze in Comex copper is not fundamentally bullish, it just highlights regional tightness. A lot of the visible surplus copper is in China and Chinese brands are not good for delivery against CME contracts and some 50% of the LME stocks are Russian and Russian brands are also not deliverable against CME copper contracts. Hence the squeeze is really a situational squeeze rather than a squeeze caused by a global shortage of copper.

Likewise, the low treatment and refining charge (TC/RC) in copper is more about the extra smelter capacity that has come on stream last year and this year, with those smelters vying for spot concentrate so they can ramp-up production, and their extra demand has created considerable competition for concentrate, which has seen TC/RCs crash. It is less obvious however, whether the global economy actually needs the extra smelted copper production at the moment. Both the CME squeeze and the negative spot TCRCs suggest a tight market, but in reality, the refined copper market is not that tight.

Recent data from the International Copper Study Group (ICSG) showed the copper market was in a 287,000 tonne surplus in the first three months of the year.

LME stocks at 116,000 tonnes are down from 167,300 tonnes at the end of 2023, CME stocks at 16,295 tons, are only slightly down from 18,819 tons at the start of the year, but SHFE stocks at 321,695 tonne are up significantly from 30,905 tonnes at the start of the year. All in, exchange stocks are 237,200 tonnes higher now than at the end of 2023. This supports the ICSG data that the market is well supplied.

Another sign of weak demand is weakness in copper premiums in Asia, indeed spot premiums for copper cathodes cif Shanghai, are showing a $5-25 per tonne discount, according to Fastmarkets’ assessments. While the discount suggests weak demand, it is also no doubt highlighting consumer destocking into the high prices. Later on, this is likely to turn into a bullish factor as pent-up demand picks-up.

Premiums doing their thing

The great thing about markets is that they are dynamic so they work to keep things in balance as much as they can. The regional tightness in the US has lifted US premiums, so with negative premiums in China and rising US premiums, the market is now trying to rebalance the regional imbalances. The differential in regional premiums now means South American material that was earmarked to go to Asia is now being diverted to the US, which will help alleviate the US tightness.

Funds

The question is will the funds that have ramped up their long exposure in copper now be prepared to hold on until the fundamentals catch-up. If not, then a downward correction would seem likely. As things stand, some funds do seem to be having second thoughts.

The funds trading LME copper built their net long position to 71,900 lots in mid-May, up from a mid-January low of 5,345 lots, it has since drifted to 58,908 lots, as of May 31. Over the past two weeks the longs have reduced exposure and the shorts have added their positions.

The Outlook

While the copper market is reportedly in supply surplus, Fastmarkets’ research does expect the copper market to tighten up as the year progresses and to end up being on a deficit this year. As such, we are bullish for copper prices (and it is hard not to be given the once in a century evolution the world is going through as it transitions away from fossil fuels to renewables and electrification), but we do think prices have run up too soon. Having been up an average of 26% at their highs, the base metals are now up by an average of 15% - let me know in the comments how much further do you think prices will the correct?