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Copper Could Be Set For A Pull-Back

Commodities | Sep 11 2017

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Can copper hold onto its rally? Several brokers suggest it may not.

-Same elements supporting the rally are key to the unwinding
-Large scale speculative buying will become a headwind when positions are sold
-Renewed desire for growth could push more miners to explore M&A


By Eva Brocklehurst

Copper has ridden a broader commodities uptrend amid improved demand sentiment regarding China. The price on the London Metal Exchange 3-month contract came within a whisker of US$7,000/t recently, a price not seen for three years.

Still, brokers suggest the copper price is vulnerable. Supplies are stable, physical spot market price indicators are flat and there are lower imports of cathode into China.

Macquarie canvases the potential for a correction back towards the low US$6,000/t region. The same elements that supported the price a key to the unwinding, the broker contends. Futures prices moved close to US$7,000/t without any signs of issues with physical availability, yet demand is anecdotally weaker since July and the broker suggests August should show another round of weakness.

Moreover, speculators have never been so long and Macquarie believes this presents technical downside exposure. Just as contagion from other commodities on a rally has helped copper hitch a ride, the broker believes a sell-off in any of these, such as iron ore and thermal coal, will carry copper down too.

UBS agrees speculative buying has played a large role in the appreciating copper price and will become a headwind when positions are sold.

The broker considers the current spot price is now fair for the short-term, as supply disruptions proved greater than previously expected and demand indicators from China remain robust. Nevertheless, over the next 12 months, the broker suggests mine productivity should improve and China's property cycle could weigh on demand.

Disruptions are having a major influence on the tightness in the metal market at present, UBS observes. Exports from both Chile and Peru, which account for 40% of mine supply, were very weak in July and an improvement in mine productivity will help alleviate tightness in the months ahead.

Deutsche Bank finds near-term indicators are now less positive and envisages greater downside risk for copper prices in the near term. The broker cites falling premiums, widening scrap discounts and growing CFTC speculative positions as signals there is near-term weakness on the horizon.

On the positive side, LME inventories have fallen by around -80,000t since the start of August and bonded warehouse stocks by around -40,000t, but, in the case for the negative, cancelled warrants have declined by -30,000t since mid August.

Furthermore, both Shanghai and Yangshan premiums have fallen by -US$8-9/t. Scrap discounts have widen to around -20% of the LME price from -14% in mid July, signalling to the broker that demand for scrap is incrementally weaker.

Deutsche Bank notes a recent trend of miners approving more brownfield growth projects, such as BHP Billiton's ((BHP)) Spence, and OZ Minerals' ((OZL)) Carrapateena. The broker expects acquisitions will come back into focus, and this renewed desire for growth presents both opportunities and risks.

Given fewer miners possess projects that are ready to be approved, this could push more of them to explore M&A. Deutsche Bank expects Rio Tinto ((RIO)) to be among those most active in copper M&A over the medium term.

On the other hand, miners will need to be more cognisant of capital intensity for future growth, the broker suggests. For example, the Spence hypergene project will use a third party to build, and initially operate, the required desalination infrastructure.

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