Copper sank below $7,000 a tonne to a one-month low on Tuesday after inventories surged and Chinese traders squared positions ahead of the Lunar New Year Holiday.
Prices fell as much as 2.3 per cent to $6,900 a tonne as stocks at London Metal Exchange warehouses jumped by 28 per cent, or the most in 10 months. The sell-off also hit mining stocks, which were among the worst performers in the FTSE 100.
Anglo American dropped 3.9 per cent to 1,723p, while Glencore slipped 2.9 per cent to 390.75p and Antofagasta lost 2.8 per cent to 967p.
“The news that triggered the copper selloff has been a 36,000 tonne surge in LME stocks, perhaps reinforcing the belief that the cathode market is well supplied,” Edward Meir of INTL FCStone, a broker.
Cathodes are the basic product of copper production and used to make rods, wire and other products. Figures released on Monday showed China’s refined copper output risen 16.7 per cent year-on-year to a record high of 865,000 tons in December, as smelters produced as much as possible before new treatment and refining charges, which are the lowest in five years, kick in.
LME warehouses have been rocked by large deliveries of copper seven times since the middle of 2016, reflecting a battle between two physical traders – rumoured to be Glencore and Trafigura – with opposing views on the market.
“It’s a mini-trading war between Glencore and Trafigura,” said one analyst. Typically the influx of metal (a bearish signal) is countered by a cancellation of warrants (a bullish signal) and the metal leaves the LME system.
While traders are now used to this long-running tug-of-war it still has the ability to move prices, particularly when there are concerns about demand in China, the world’s biggest consumer of commodities.
“Many algo traders follow LME stock signals, said Xiao Fu, head of commodity markets strategy at BOCI Global Commodities, adding Tuesday’s deliveries could have triggered sell orders.
Ms Fu said Chinese traders liquidating positions ahead of the Lunar New Year holiday, when industrial activity in the world’s second biggest economy slows, also contributed to copper’s weakness on Tuesday.
Copper is a big source of earnings for many of the world’s biggest mining companies, including Anglo American, Glencore, and BHP Billiton. Analysts are generally positive on the outlook for prices this year given the bullish forecasts on global growth and potential supply disruptions.
“The fact that copper premiums are fairly restrained as well is also reinforcing perceptions that there is no immediate supply tightness, but the market still perceives (correctly in our view) that potential labor-related bottlenecks could change this outlook as the year goes on,” said Mr Meir.
Citibank estimates that almost 30 sets of labour contract negotiations are set to take place over the next 12 months, potentially affecting 25 per cent of global copper supply. This includes Escondida, the world’s biggest copper mine in Chile, where one of the unions has already held a one-day warning strike.
A weak US dollar, which makes the metal cheaper to buy for non-US buyers, could also help support copper, which is used in everything from wiring to power grids “I think copper below $7,000 is a good buying opportunity,” said Ms Fu.
Source: FT.com
