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Metal Miner

Metal Miner

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China’s Stimulus Measures Prop Up Copper Prices

  • Copper prices saw a temporary rise after China announced a new round of stimulus measures, which included interest rate reductions andthe potential allocation of funds towards infrastructure and property sectors.
  • Despite ten consecutive increases, the US Federal Reserve decided to hold interest rates steady, but projected additional hikes by year's end, impacting the copper price due to its inverse relationship with the US dollar index.
  • The long-term future of the copper rally remains uncertain as factors like the Chinese consumer response to the stimulus, ongoing supply deficit concerns, and rising LME inventory stocks could significantly influence market trends
Copper

Via AG Metal Miner

The Copper Monthly Metals Index (MMI) fell 4.29% from May to June as the average copper price continued to show short term volatility.

Copper prices ultimately rebounded after declining in May. After the start of the month, the copper price index started forming short-term patterns that showed potential upside reversal. However, price action would need to continue up and break through resistance levels to establish a clear uptrend.

China Stimulus Sees the Copper Price Rally

Source: MetalMiner Insights

Copper prices appeared increasingly bearish throughout Q2, trading down for two consecutive months. However, news of China’s latest stimulus efforts helped prices find a bottom in late May. Soon after, the index saw an almost 8% rebound.

The rally comes in contrast to what has proven a lackluster economic recovery. While China’s services sector continues to post strong growth, its manufacturing sector performed inconsistently over recent months. Indeed, China is both the world’s largest producer and consumer of commodities. However, years of strict lockdown policies caused consumers to prioritize experiences instead of goods. Meanwhile, exports declined amid a slowdown in the West. Both of these factors continue to offer little support to metal prices. On top of ongoing challenges within its property sector, a high youth unemployment rate, and a near-zero inflation rate, markets speculated for months that Beijing would intervene.

China finally did just that with a new round of stimulus measures. Most recently, China’s central bank implemented a sequence of interest rate reductions. This marked the first reduction of a key policy rate since August. Reports indicate that there is more stimulus to come as Beijing continues to strategize measures to rejuvenate the nation’s sluggish economy. These include the potential allocation of billions of dollars towards new infrastructure investments and the easing of regulations to incentivize property investors to purchase additional homes. 

Fed Holds Rates Steady, But Forecasts More Hikes

Meanwhile, the United States Federal Reserve confirmed market expectations, deciding to hold interest rates at their current level following ten consecutive increases. However, the group also signaled that rates would increase by another 50 basis points by the end of December. The next hike could occur as early as July as the FOMC continues to monitor inflation, the resilient labor market, and credit conditions. 

Since finding a bottom in early 2023, the U.S. dollar index (DXY) has mostly traded sideways between 100-105. The Fed’s announcement weighed on the DXY, adding support to the copper price index due to the inverse relationship. Additional rate hikes could help push the dollar back up toward the top of its current trading range. That said, a meaningful uptrend appears unlikely. 

Most notable of all were the projections suggesting a soft landing for the U.S. economy remains possible, although not guaranteed. In a June 14 news conference, Jerome Powell stated, “There is a path to getting inflation back down to 2% without having to see the kind of sharp downturn and large losses of unemployment that we’ve seen in so many instances.” Part of this optimism was to do a lower projected increase in the unemployment rate. The Fed expected a 4.5% rise in March, a jump typically associated with recessions. However, new projections lowered that forecast to 4.1%, which is still higher than the 3.7% unemployment rate posted in May. In its March meeting, the Fed also raised its 2023 GDP expectations from 0.4% to 1%. 

So, Will the Copper Price Rally Last?

As for the leading question of this article, the fate of the copper rally remains somewhat uncertain. From a technical perspective, price action has yet to confirm a meaningful uptrend. This leaves the copper market outlook somewhat cloudy. The most recent Commitment of Traders report from the LME showed investment funds for copper have shifted back to a new long position after briefly turned net short at the end of May. It’s true that the long-term bull narrative fueled by projected supply deficits remains a valid concern for markets. However, LME inventory stocks continued to trend upward as they have since January. In early June, stocks actually hit their highest level since November amid the slowdown in the West.

Improved expectations for the U.S. economy and China’s stimulus measures could begin to see those levels drop. However, much will likely depend on how China’s economy and consumers respond. Even with incentives, consumers in China will likely operate with caution, especially as it relates to the beleaguered property sector. It’s unlikely to surprise markets if Beijing announces more stimulus in the coming weeks, which will temper those efforts’ immediate impact on prices. Nonetheless, copper imports into China rose over 9% month over month in May. Should copper imports continue trending upward, markets may begin to feel the pinch of tight supply once again.

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By Nichole Bastin

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