Copper primed for a pop if U.S./China trade war is resolved

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SINGAPORE (Reuters) – Low inventories across the copper supply chain mean that any resolution to the U.S.-China trade war could trigger a snap rally in prices as consumers rush to restock, market participants said on Tuesday.

FILE PHOTO: An electric copper wire is seen in this illustration picture, October 25, 2017. REUTERS/Max Rossi/File Photo

    Combined stocks of on-warrant copper in London Metal Exchange and Shanghai exchange warehouses have declined 50.5% since mid-August metal buyers have slowed replenishment rates.

    Declines in warehouse stocks are often seen as a sign of robust demand in the main industrial demand centres for the metal, used in construction and power industries.

But low stocks also reflect a risk reduction strategy by consumers who have switched to making hand-to-mouth purchases that avoid building any inventories not already ordered by a customer, delegates at an LME conference in Singapore said. 

    “Trade war concerns have been going on now for over 12

months and, understandably, participants all the way through the

supply chain have de-stocked to reduce risk,” said Guy Wolf, head of market analytics at broker Marex Spectron in Singapore.

    “But once the market has certainty about the trade and

tariff outlook… the psychology will completely flip, because

everyone will want to restock. They’ll fear that prices will

run away from them,” he said on the sidelines of the

conference.

But the current lack of certainty over how the tit-for-tat spat will play out is making traders cautious about making new purchases, he said.

“If it’s the imposition of a new tariff… you can’t hedge that risk. That’s why people are trying to minimize their

exposure.”   

Julie Zhu, a director at Singapore-based Viant Commodities, said the market in China was slow.

    “I think the best indicator is to look at the bonded

warehouse copper stocks. It’s 200,000 tonnes of metal, which is a third of its peak in 2017. Usually copper is a great indicator

of the Chinese economy … so the fact that it has dropped by two thirds tells us lots.”

    Shigemoto Toma, a senior base metals trader with Anglo

American, said China’s infrastructure investment could boost copper demand by as much as 3-4% in 2020, which could impact prices due to “not much of a (stocks) buffer.” . 

    “All in all, if we see a resolution to the U.S-China trade

tensions, we are likely to see substantial upside.”

    LME copper traded at about $5,834 a tonne on Tuesday, down 0.8% on the day and 2.2% for the year.

Reporting By Melanie Burton. Editing by Jane Merriman

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