Copper Prices Spike Confirming Copper Market Uptrend

In recent days, copper prices managed to break prior highs after experiencing several weeks of pullback. Prices managed to hit short-term demand zones, which typically induce bullish strength. This confirmed the recently-formed uptrend in the copper market, ending the macro downtrend that started earlier in 2022. New data indicates the start of a bullish market, increasing the potential for further upside price movement. However, buyers should not rule out pullbacks, as prices remain historically high. 

Overall, the Copper Monthly Metals Index (MMI) rose 3.19% from December to January.

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China Speculation Fuels Spike in Copper Market

Throughout November, the dismantling of China’s zero-COVID policies saw copper prices rise over 3% for the first time since March. However, the copper market started moving sideways again in December as surging infection rates continued to disrupt economic activity. Now, as major cities near and pass their COVID peaks, copper prices again appear decidedly bullish.

While Chinese demand has not necessarily “recovered,” markets appear optimistic. In a recent Financial Times article, Caroline Bain, commodities economist at Capital Economics, noted “we are expecting a rapid rebound in China’s economy.” Bain is not alone in her sentiment. Already, during the first two weeks of the year, copper prices jumped over 7%. This brings them to their highest level since June.

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Downside Risk: Rural Cities Next, Construction Sector Remains Weak

While numbers appear to have peaked in some areas, China’s latest COVID wave is not over. Zeng Guang, former chief epidemiologist at the Chinese Center for Disease Control and Prevention, warned, “our priority focus has been on the large cities. It is time to focus on rural areas.” This could indicate China is still two to three months away from its countrywide peak. Of course, recoveries in major cities will have a larger impact on markets than in rural areas. Still, this means we won’t see the true extent of post-zero-COVID Chinese demand until Q2. That is more than ample time for markets to potentially over-speculate. Furthermore, overall uncertainty related to China’s recovery and the continued threat of COVID-related disruptions will increase the likelihood of volatility.

Copper Market: Future Issues Waiting for China

When China finally does find itself on the other side of the pandemic, many other problems await. For one, the construction sector remains weak amid the ongoing property crisis. Of course, China has made continued efforts to support the sector. The most recent was a move away from the “three red lines” policy. This shift helped ease debt constraints on developers, but the industry remains in decline. Q4 of 2022 marked the sixth consecutive quarter of year-over-year declines in housing sales.

According to the China Construction Machinery Association, excavator sales in China, a proxy for construction activity, saw a 23.8% decline. China’s aging population will add yet another layer of difficulty to the recovery as many wonder who else is left to build for in the future? The construction industry has historically served as one of the largest consumers of China’s overall copper demand. Should declines continue and demand see limited recovery, it could trigger a strong pullback in the country’s copper market.

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U.S. Dollar Slides as Inflation Slows

Meanwhile, a falling U.S. dollar has added further support to the copper market. In fact, the U.S. dollar index, which has an inverse correlation with commodity prices, now sits at its lowest point since June. 

Also, slowing inflation numbers continued to weigh on the U.S. dollar index. While some hoped for a more aggressive fall, the Consumer Price Index fell 0.1% in December, marking the sixth consecutive month of declines. For markets, this likely means the Federal Reserve will continue on its current path after it slowed the pace of interest rate hikes last month. The Fed’s next meeting will be from January 31 to February 1. This could result in an even smaller increase after the 50 basis point increase in December. In a recent speech, Philadelphia Fed President Patrick Harker commented, “hikes of 25 basis points will be appropriate going forward.”

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Biggest Moves in the Copper Market

• Indian primary cash copper prices saw the largest month-over-month increase as prices rose 8.23% to $8.46 per kilogram as of January 1.
• Korean copper strip prices rose 7.23% $10.54 per kilogram.
• LME primary three-month copper prices saw a 4.4% increase to $8,400 per metric ton.
• Meanwhile, Japanese primary cash copper prices fell a mere 0.14% to $8,612 per metric ton.
• Chinese primary cash copper prices also edged downward with a 0.15% decline to $9,508 per metric ton.

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