Article in FT13 Jun 2019 13:02
The macro is trumping the micro in commodity markets. Since US President Donald Trump’s May 6 tweet threatening higher tariffs on hundreds of billions of Chinese goods, major raw materials have been in the doldrums with only gold, iron ore and a few weather-hit crops managing to buck the trend. Everything else has been under pressure. Take copper, which is often viewed as a bellwether for the global economy because of its wide range of uses in construction and industry. It has dropped 9 per cent since the start of May and is sitting at $5,855 a tonne. It has been weighed down by the US-China trade uncertainties and concern about slowing global growth. There has also been a big increase in bets against copper in the futures market. From a net long position of 23,000 contracts in March, hedge funds and speculators have turned bearish. As of last week they were net short copper to the tune of 46,000 contracts (a net short position means that there are more bets on prices falling, than rising).The pessimism is understandable in light of the trade spat and the growing sense that Mr Trump is determined to undermine the Chinese economy. However, the underlying fundamentals in the physical copper market do not look that bad. In China, which consumes half of the world’s copper, domestic premiums — the extra amount buyers are willing to pay to get metal immediately — have more than doubled in the past couple of weeks to Rmb150 ($22) a tonne, according to BMO Capital Markets. Meanwhile, copper stocks in bonded, or customs-controlled warehouses, have fallen by 85,000 tonnes over the past month. With the next round of Beijing’s scrap-metal import restrictions about to kick in, a further stock drawdown is expected. “While macro positioning in copper is very much negative as expectations of a prolonged trade stalemate rise, underlying fundamentals still look relatively robust,” said Colin Hamilton, head of commodities research at BMO.This is also true of the supply side, where there has been a string of disruptions this year. In Chile, a strike at Codelco’s giant Chuquicamata mine looks likely while a fierce legal battle between the Zambian government and India’s Vedanta Resources has crippled operations at its local unit. For the moment, then, fundamentals count for little, held hostage by jitters over trade. As such, the G20 meeting in Osaka at the end of the month is a critical event for commodity markets. If — and it is a big if — there is a tariff truce the price of copper could snap back above $6,000 a tonne as short sellers rush to cover positions. But to sustain a rally further stimulus in China would be needed, according to analysts at Citi. And that is unlikely to emerge until the Communist party’s politburo meeting in late July.
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