Copper has attempted to rebound since early September following a marked sell-off in the summer months where macro and fundamental forces have been prevalent.
On the macro front, copper has benefited from a slight easing in US-China trade tensions and more monetary policy easing across the globe - including China, where copper consumption is the most exposed - that has shored up investor sentiment.
Looking at the fundamentals, copper has enjoyed a pick-up in restocking during the typically strong months of September and October, a marked drawdown of Chinese inventories and slowing growth, which reflects tight concentrate supply and strategic maintenance closures of some smelters.
While the sustainability of the recent rebound in copper is uncertain, the current positioning among the speculative/CTA community suggests that market participants' hypotheses about the forward fundamental balance are excessively pessimistic and out of sync with the present dynamics. This strengthens the case for a short-covering rally in the fourth quarter, at least on a tactical basis.
Our expectations for stronger fundamentals could underpin the repositioning and the resulting copper price strength we envision. We expect meaningful tightness in the refined market in the second half of this year, projecting a deficit of roughly 300,000 tonnes during the period after a surplus of 74,000 tonnes in the first half. This should result in a deficit of 224,000 tonnes for the whole of 2019. For 2020, we expect a deficit of 350,000 tonnes.
On the supply side, we expect smelters' margin pressures from low treatment and refining charges to increasingly constrain refined output growth, especially from next year. On the demand side, we expect an acceleration in Chinese copper consumption in the fourth quarter of 2019, mainly driven by a boost in demand from the electric power sector after seasonal weakness in the first half.
In 2020, we expect a rebound in global copper consumption due to the policy-easing shift implemented this year in major economies. This should start to have a positive impact on the manufacturing sector.
We forecast a base case for the LME cash copper price of $6,500 per tonne in the fourth quarter of 2019 and $6,986 per tonne in 2020 - 12% higher than our 2019 base case of $6,233 per tonne.
While we are fundamentally constructive in our copper outlook, we believe that macro uncertainty remains a key downside risk.
LME copper cash price, $/tonne
2019 forecast average price
$6,986
2020 forecast average price
$6,133