The price of copper has widened to the biggest discount against its futures equivalent in almost two decades, in a warning sign of a sudden weakening in global demand as China’s economic rebound stalls.
Copper for settlement in two days was $66 cheaper on Monday than buying a contract to deliver the metal in three months’ time, a difference that traders said reflected concerns that China’s industrial rebound was not materialising. The gap between the two prices is the largest since 2006, according to the London Metal Exchange.
The sharp fall in spot price reflects a rapid rise in stockpiles of the metal outside China in LME warehouses, as US and European industrial activity begins to slow after a year of rapid interest rate rises.
Known as Dr Copper for its ability to gauge the health of the global market, the metal is widely used in buildings, infrastructure and household appliances.
Natalie Scott-Gray, base metals analyst at broker StoneX, said that copper prices were starting to be driven by real world signs of weak demand rather than big macroeconomic factors, such as the US dollar and sentiment towards China’s reopening.
“It’s the first physical evidence we’re seeing that demand is being impacted worse than expected in the west,” she said. “It’s the pace of change that has caused the gap”.
The price of copper has fallen 11 per cent in a month to almost $8,000 per tonne, its lowest level since November, in part because China has not grown as fast as expected since it lifted its tough coronavirus restrictions near the end of the last year.
Positive sentiment around the reopening of Asia’s biggest economy helped leading industrial metals to rally more than a quarter between November and January.
“It hasn’t been as dire as this for many a year,” said Al Munro, metals strategist at Marex, a London-based broker. “The bullish scenario was all based on a China rebound which hasn’t materialised as we in the west suffer from an economic slowdown.”
The west’s manufacturing slowdown and fading momentum for a China recovery led Goldman Sachs on Sunday to revise its forecast for average copper prices this year from $9,750 per tonne to $8,698 per tonne. It added that metals were “priced for a recession”.
Higher interest rates have made banks cautious about holding surplus supply of metal because of expensive financing costs, contributing to the dramatic “super-contango” structure where metal prices for immediate delivery are much cheaper than in the future. As a result, more metal is ending up stored in LME warehouses, which functions as the market of last resort.
The US dollar, which has gained 2 per cent against a basket of six currencies since the start of May, has also driven copper prices lower since it has become more expensive for Chinese importers.
At the same time, the easing of copper supply snags in Latin America and the resolution of a tax dispute related to the large Chinese-owned Tenke Fungurume mine in the Democratic Republic of Congo have bolstered supply.
However, some in the market remain optimistic about copper’s prospects for a price surge this year off the back of an expected surge in demand fuelled by the shift to renewable power, electric cars and infrastructure upgrades.
Bank of America reaffirmed on Monday its forecast of $10,000 per tonne for copper by the year-end as China increases spending on the grid, which uses the superconductive metal in vast quantities.
