Oil prices rose to their highest since June 2022, supported by a weakening dollar, as traders prepared for an extended period of monetary tightening in the United States. In turn, commodity strategists at Citi updated their copper price outlook and set their next stop for the commodity in the next three months.
Copper prices are rising
Copper prices hit a 22-month high on Thursday, driven by continued fund buying, a weakening dollar and tighter inventories.
Despite the surge, which has pushed copper prices up 13% this year, physical demand in China, the metal’s biggest consumer, remains subdued, according to Citi analysts.
In trading on the London Metal Exchange (LME), three-month copper prices rose 1.3% to $9,705.50 per tonne, briefly peaking at $9,739 – the highest since June 2022.
“The underlying story remains very positive, both from a challenging supply perspective and with regard to cyclical improvements in global growth,” said a Macquarie analyst.
“However, the near-term move appears to be driven by financial flows, both discretionary and systematic, moment-driven, and is now arguably leading the way.”
Meanwhile, the most actively traded copper contract on the Shanghai Futures Exchange closed 2.8% higher at 78,780 yuan ($10,883.02) in June.
At the same time, the price fell, moving away from the recent five-and-a-half-month high reached on Tuesday.
Comments from Federal Reserve officials earlier this week have reinforced expectations that monetary policy will remain tight. A weaker dollar generally makes dollar-denominated metals more affordable for investors using other currencies.
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On the LME, hedge funds have significantly increased their net long positions in copper to levels not seen since February 2021, driven by signs of recovery in China’s industrial sector and disruptions at major mines.
These disruptions have squeezed margins at Chinese processing plants, which produce more than half of the world’s supply, potentially leading to reduced output of refined metal.
Despite the expansion of domestic smelting capacity, China’s refined copper imports rose 6.9% year-on-year in the first quarter. In addition, an index of China’s manufacturing industry showed growth in March for the first time since September of the previous year.
Citi updates its forecast
In a Friday note to clients, Citi strategists said the latest rise in copper prices took the commodity above their bullish forecast of $9,700 a tonne.
Now, prices are likely on track to rise to $10,500 per tonne “under our new base case (and average $10,000/ton in the second and third quarters of 2024, versus $9,500/ton previously),” strategists wrote.
“In our (new) short-term bull case scenario, prices could even reach $12,000 per tonne in that time frame,” she added.
Citi noted that copper often serves as a more forward-looking indicator compared to many other physical commodities, such as oil, which better reflect near-term physical fundamentals.
They attribute copper’s “quasi-equity-like” characteristics to its relatively low supply and demand elasticities and high volatility of investor positioning compared to physical balances.
In addition, the strategists strongly advise corporate consumers to hedge their exposure to copper over the next three years, or consider maximizing their hedging levels during this ongoing secular bull market, “as the argument for increasing firm value through hedging consumers is strongest ahead of identifiable secular bull markets,” they said.
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