Commodities Weekly

The global economy’s bellwether – copper – is in a clear and present danger

 

Global commodities

Copper – a heavyweight that carriers the mantle of the global economic bellwether – is flashing warning signs. With China’s recovery fundamentally still domestically driven, whilst macro angst continues to mount elsewhere, copper’s apprehensions abound. Copper’s cash-to-three month spread on the LME has ballooned to the widest contango (when futures trade at a premium to spot prices) since 1994, alongside a paucity of orders driving inventories higher (a signal supplies are outstripping demand from end users). Copper’s medium-to-long term outlook remains solid, underpinned by its role in the energy transition – no other commodity in the world is better positioned than copper for decarbonisation, as there is no other chemical element globally that is a better conductor of electricity, which sits at the heart of greening the global economy. Indeed, its our most preferred supercycle long play this decade with lower prices today driving a more compelling buying opportunity tomorrow (see here). Yet, we acknowledge that near-term questions are stacking up and we expect copper – and broader base metals – to be priced for a recession until price-related physical responses from either China import buying, or signals of the start of the Fed easing cycle, provides a price floor.

 

Energy

Saudi Arabia’s influential energy minister, Abdulaziz bin Salman, issued another warning to paper crude market short-sellers to “watch out”, ahead of the 3-4 June OPEC+ ministerial meeting. The obvious reading is that the Kingdom may either unilaterally cut oil production or orchestrate a wider OPEC+ reduction in output next week, thereby supporting prices and stinging speculators that are shorting oil. Meanwhile, G7 nations sent a clear signal of support for the natural gas industry stressing the importance that “increased deliveries of LNG can play, and that investment in the sector can be appropriate in response to the current crisis”.

 

Base metals

Beyond copper (see main global commodities section above), the rest of the base metals complex has also come under significant pressure this quarter, reflecting heightened DM demand headwinds from an acute manufacturing slowdown. Yet, we expect China’s manufacturing activity to rebound back into expansion into H2 2023 as current goods oversupply corrects and demand continues to recover to pre-COVID trends.

 

Precious metals

Gold is holding steady ~USD2,000/oz as US debt ceiling angst continue to drag on with no resolution in sight, offsetting the situation with regional banks in the US which has proven to be far less concerning than initially thought by global markets. Meanwhile, silver prices have retraced below USD24/oz, down 9% from the 2023 high of USD26/oz, as weak economic data have undermined confidence in China’s rebound.

 

Bulk commodities

Iron ore has extended its losing run in recent trading days, lacking support to stay north of USD100/MT. China’s infrastructure and property sectors have performed worse than expected this year, with the price of the steel making staple’s spot rebar price in China – a cornerstone product needed for construction – on the cusp of hitting the lowest since 2017.

 

Agriculture

The recent two month extension of the Ukraine-Russia Black Sea grain deal that is keeping grain prices – corn, wheat and soybean – in-check, is being compounded with buoyant planting conditions in the US (the world’s largest producer).

 

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.

 

 

CHART OF THE WEEK: COPPER’S WARNING SIGN TO THE GLOBAL ECONOMY