Investing.com — Prices fell recently, falling below $9,000/mt for the first time since April. This was caused by a combination of factors, including rising inventories, disappointing production data and the outcome of the third plenum in China.
Despite the recent weakness, analysts at UBS Global Research remain optimistic about the medium-term prospects for copper. “We reiterate that $9,000 per tonne is an attractive medium-term entry point to consider,” the analysts said.
Supply constraints are expected to support prices
Several factors support UBS’s positive outlook for copper. First, while visible inventories have increased somewhat, they remain low by historical standards. This suggests that there could be a potential imbalance between supply and demand in the future.
Second, major copper miners have reported weaker-than-expected production results for the second quarter, indicating continued supply constraints. This is further evidenced by the fact that Codelco’s production is down 7% this year.
Speculative madness is waning
The recent copper price correction has been accompanied by a decline in speculative positioning. This suggests that the market is becoming less turbulent and the price decline is likely to reflect cyclical and policy headwinds rather than a fundamental shift in the copper market.
Short-term headwinds
UBS signals that short-term demand for copper is weaker than expected. This has led to a build-up of inventories. However, analysts expect this to be a temporary phenomenon.
UBS attributes the subdued demand specifically to weak Chinese end-user interest in refined products. This weakness has been exacerbated by mid-stream destocking and delays in purchases by state grid operators.
UBS recommends buying copper at the current price level of $9,000/mt as a medium-term investment strategy. Moreover, analysts suggest they should sell downside price risk to generate additional returns over the next six months.
