Copper declines amid concerns over weak demand
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
A weaker USD failed to boost investor appetite, with profit-taking driving most sectors lower last week. A lack of clear signals from fundamental data didn’t help.
Prices and commentary accurate as of 07:00 Sydney/05:00 Singapore/17:00(-1d) New York/22:00(-1d) London.?
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Market Commentary
Copper led the base metals sector lower last week as weak economic data in China weighed on sentiment. Data on Friday showed that China’s official manufacturing Purchasing Managers Index fell to 49.5 in May, signalling a softening of factory activity in the world’s largest consumer of the red metal. This followed data from the US showing inflation moderated in April as consumers dialled back their spending. However, supply side issues are likely to limit the losses. Chile, the world’s largest producer, recorded its lowest month of copper output in more than a year. Total production in April fell 6.7% from March and was down 1.5% y/y. Aluminium bucked the trend to end the week higher amid prospects of future supply cuts in China. Beijing announced new capacity limits on alumina refineries. It also reaffirmed strict implementation of the aluminium swap scheme, where any new smelter needs to be matched by the closing of an existing one.
Iron ore fell after the recent property support measures in China failed to ignite much hope of stronger demand. While stalled projects may be resumed, the measures will do little to stimulate new projects, which are the real drivers of steel/iron ore demand. Stockpiles at Chinese ports remain elevated without any signs of a notable drawdown.
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Crude oil prices spent the week trading in a tight range as traders looked ahead to the weekend OPEC meeting. Fundamental data was largely neutral. A larger than expected drawdown in inventories in the US earlier in the week was offset by concerns about weak gasoline demand. Implied demand in the US fell to 9.148mb/d as the US driving season kicked off. Demand for distillate also plummeted to its lowest levels in 26 years in March, according to EIA data. Nevertheless, the market’s attention remained on OPEC. Reports emerged that suggested the oil group is looking at options to extend production curbs into 2025.
Global gas prices gained as high temperatures across Asia raised concerns of tighter supplies. Extreme weather is putting pressure on Asian power markets, with electricity prices rise strongly. Peak electricity demand in India edged above 235GW this week, a record for May. Similar but less severe cases are also occurring in China, Japan and Thailand. Natural gas is likely to see the greatest benefit to demand. This should leave the LNG market finely balanced.
Gold gained earlier in the week on prospects of rate cuts later this year. The Fed’s John Williams said he expects inflation to continue to fall in the second half of the year. Data on Friday showed that core personal consumption rose 0.2% from the prior month. This was largely as expected and saw yields on US Treasuries fall and the USD weaken, providing some support to investor demand. Silver prices jumped earlier in the week as physical demand showed signs of growth. China has increased its imports in recent months, hitting a three-year high of 340t in April. The premium on Shanghai spot prices climbed to 15% last week, while stockpiles in China have dwindled due to persistent strong demand from the solar industry.?
Chart of the Day
Chile's copper production has struggled to grow as operations get deeper and more difficult to operate