Copper Demand: China Has Been Doing The Heavy Lifting

Copper prices: bullish arguments

Copper has been stuck in a range-bound market over the past two weeks as there are multiple counterbalancing forces. On the bullish side, the supportive factors in the macro backdrop are still in place, including the Fed’s supportive stance and the dollar index continuing to be under pressure. 

Meanwhile, governments’ stimulus packages are expected to kick-start their economies. Recent economic indicators are still validating the strength of China's economic recovery – rather than contradicting it. On the micro-level, the London Metal Exchange on warrant inventories continues to grind lower, and now both the LME and Shanghai Futures Exchange markets are in backwardation with tightened spreads in the front of the curve to fence off nearby bears.

Copper price: bearish arguments

On the bearish side, elevated political tensions see no signs of easing, but only escalating, along with headwinds for riskier assets. Mining disruptions (both virus-related and strikes) risks are starting to recede ahead as long as there is no major reversal in virus cases, and, in fact, some have managed to return to work.

China demand, which has been doing all of the heavy-lifting so far this year, is expected to have entered its seasonal lull and pent-up demand is set to dry up. Support from cathode displacement to scrap has mostly faded. Meanwhile, a resurgence of COVID-19 cases has been seen at multiple locations around the world, which casts a shadow over the economic recovery path.

What does this mean for short-term prices? After an astonishing rally seen in 2Q20, momentum seems to have been lost in the near term, absent a strong dominant theme. Unless a factor comes to the forefront, copper is likely to continue trading in a range-bound pattern.  

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