peculators are easing their short bets on the price of copper, causing prices to rebound over the past few weeks. These gains are part of a wider trend in the markets, which is sensitive to the rise in risk appetite. The market is still below the yearly highs of last year, and downside risks may already be priced in. But if the global economy continues to recover, the recovery in copper prices is a strong possibility.
The first half of the year saw increased refinery activity and strong imports. While this has helped to boost the market, it has also created a tight supply balance. As a result, copper prices have retreated from their March highs by 25%. Combined with slower global economic growth, this has led to concerns about a hard landing for the global economy. The Federal Reserve and other central banks have begun to raise interest rates. Traders are worried that the rise in rates will put pressure on industrial metals.
On the other hand, copper prices are also likely to benefit from the recent economic recovery in the West. Some analysts predict that this will trigger an increase in the demand for copper. The International Monetary Fund has revised upward its global growth estimates for 2021, from 3.5% to 5.5%. However, while reflationary conditions are likely, economists also predict a slight deficit by 2023.
One reason for this is that the Chinese economy is functioning at pre-pandemic levels. In fact, China’s credit cycle seems to be turning. As a result, the government is giving green light to provincial governments to boost spending. This should support an infrastructure-led recovery in the world’s largest copper consumer.
Another positive is the fact that the United Kingdom and France have committed to achieving net zero emissions by 2050. Other countries are also committing to this goal. This has added some credibility to the notion of a “green transition” as it relates to copper. While this may not translate into a price spike, it is certainly an encouraging sign. In addition, Japan has also taken the lead in implementing the first ever carbon tax. This should help to reduce the impact of greenhouse gas emissions on the economy.
The International Monetary Fund also notes that the “copper market is the most sensitive to changes in monetary policy.” It would not be surprising to see copper prices surge with the dollar falling. In addition, many analysts expect the US Federal Reserve to be closer to monetary policy neutrality by 2021.
Despite these expectations, the short speculative position has only been slightly pared back. As of late July, the net short position was 26,384 lots, while the short-to-long ratio was -8.8k. This is not much, but it is more than the -6.8k reported by the Commodities Futures Trading Commission (CFTC) on Wednesday. This means that speculators are more inclined to buy futures than sell. They can then take on the risk of contango, or the state of the price of a futures contract that is higher than the expected spot price.