Recent copper price strength can largely be attributed to pipeline restocking, strong demand from the US power sector and tight scrap supplies Barclays says. But, the bank cautions against too much optimism.
Writing in its latest Metals Magnifier note, the bank says that while the rally has come amid positive sentiment around Chinese demand, “recent big price increases in the base metals have been less a reflection of new bullish positions being established on signs of economic stabilisation in China and more a symptom of extreme short positioning when sentiment was overly bearish.
According to the bank’s composite of leading indicators for the month of August, “a small pickup in demand momentum across the base metals complex for the coming months” is expected. “Notably, smoothed copper consumption has started to diverge from the copper leading indicator, which we believe is due to restocking in China,” it says.
According to the bank, US demand has been exceeding forecasts due to housing-related restocking and autos demand.
This rise is seen as an upside risk to US demand for the red metal in the second half of the year. But, it points out, “To put this into the context of our global market balance, even if demand growth was three times our current 2.5% forecast for H2, it would only result in an extra 43Kt, on our calculations.”
However, the bank also cautions that restocking could well begin to run out of steam in the second half of the year and, given that US power run rates are already above their annual targets,” power grid spending could slow sharply in H2″.
Were this to happen the bank says “import demand could start to ease at a time when sequential increases in mine supply will be at their strongest, leading us to expect a low for prices in Q4. Hence, we favour shorting copper above $7,200/t.
Part of the reason for this, Barclays explains is the fact that the supply picture for copper continues to look strong.
The copper miners have raised H1 production by a total of 12%, Barclays says and adds, “Chilean mine production continues to exceed expectations, posing upside risks to our 17.3Mt forecast, while refined production has been weaker due to issues at Collahuasi.”
On the scrap side of the market, Barclays says that, while the global scrap market is tight, “secondary in refined production is still growing at a rapid pace, and use hit a record high of 19.1% in April. “