Copper price is approaching its February high

Copper is starting to rise again after reaching multi-year highs in late February. In fact, it is only 1.3% away from the local high and just over 7% from the historic peak located above $10,000. Currently, the price has broken above the $ 9,000 / tonne, which is the result of several factors. Firstly, this is due to the weakness of the US currency. The dollar held back many commodity markets from further recovery. The increase in bond yields around the world in recent months is the result of rising inflation expectations. This, in turn, is not a negative factor for industrial metals. On the contrary, they can be a potential protection against inflation, as their prices largely influence its growth. We are currently observing a clear rebound in prices in China, mainly on the producer side and in the United States.

It is worth noting that after a slight weakness in February, March was very good in terms of demand from China. In March, imports increased by 25% year-on-year, reaching the level of almost 553,000. tone. In turn, the entire first quarter brought an increase in imports in this country by 11.9% y / y, reaching the level of 1.44 million tonnes. This is the best quarter for metal imports since at least 2008.

On the other hand, there are signs of fading upward momentum. First, bond yields in the United States have recently reduced gains. An important indicator for the ratio of copper prices to gold is the level of bond yields in the US. The second thing is a much higher level of inventories on the stock exchanges, both in China and in London. They have now clearly increased since February and are at their highest levels since autumn 2020. Lack of concerns about the availability of copper in China caused the price premium in this country to drop to $ 50 per ton, while in February it was over $ 70, and in the middle of last year the premiums reached as much as $ 100 per ton. Despite the recent slight rebound in lending in China, the market is expected to cool down, given the limited expansion of the central bank in China compared to other central banks. Finally, it is worth mentioning the consolidation of production in Chile, which has still not returned to pre-pandemic levels. The ongoing wage disputes in this country mean that production is relatively low, but there is a significant risk of its increase this year, due to a significant increase in global demand.

Relatively high copper inventories on the world's largest exchanges. Source: Bloomberg

The premium price paid in China for copper is falling, which means that there are no longer problems with the availability of this commodity. Source: Bloomberg

Behavior of prices is reminiscent of the end of the 2011 rally. Similar behavior could lead to a slight breakthrough above the recent local highs. However, as long as the price sits above the trendline, the outlook still looks positive for the market. At the moment, the weaker dollar is definitely helping and the ECB's reassurance that loose policy is still needed. The Fed next week may be an important factor for copper. Ensuring further strong monetary easing will be crucial for the industrial metals market, even without much activity from the monetary authorities in China. Source: xStation5

Taking into account the above-mentioned factors, it can be assumed that the increases in the copper market may be limited. On the other hand, the previous crisis teaches us that we may only be halfway through the price rally, given that economies around the world are yet to open up rather than looking for a similar behavior from the declining growth phase of 2011. Either way, China accounts for 50% of global demand. Therefore, the trend in metal imports and possible supply reports from South America will determine the direction and scale of the movement on the copper market.