Risk-off environment threatens an even deeper decline in copper prices in 2019

File Photo: Sheets of copper cathode are pictured at BHP Billiton's Escondida, the world's biggest copper mine, in Antofagasta

Ravindra V RaoAnand Rathi Commodities

Copper rallied smoothly in 2016 and 2017 but the red metal has experienced profit-booking this year. The copper market fell victim to a stronger dollar, higher US interest rates, and the trade dispute between the US and China, which is weighing on economic growth in Asia and threatens to impact the global economy.

Copper is a metal that is a bellwether for other commodities as well as markets across all asset classes. The red metal is a barometer of economic progress around the world.

In 2018, the price of Comex copper was around $3 until June. The threat of a strike at the world's leading copper mine in Chile in June caused the price to move toward the high, but it failed and fell just 0.65 cents shy of the late 2017 peak.

The trade dispute between the United States and China weighed on China's economy, and copper prices, along with those of many other industrial commodities, declined.

Meanwhile, copper inventories often influence the price of the metal. When stockpiles grow, the price tends to drop, and periods of declines often support the price of the red metal. However, in 2018, significant declines in stocks at LME and Shanghai warehouses have done little to support the price of the non-ferrous metal.

The early December meeting between Presidents Trump and Xi at the G-20 gathering in Buenos Aires resulted in an agreement not to introduce any new tariffs or protectionist measures for 90 days and to negotiate a trade agreement that would end the dispute.

While many commodities have found themselves in the crosshairs of the trade dispute, economic weakness in China and around the world because of the issue has furthered the squeeze on the copper market.

Copper's path of least resistance could be in the hands of the US and China's trade negotiators in the first quarter of 2019. If the price action that followed the meeting in Argentina at the start of December is any guide, a trade deal between the US and China would likely ignite a rally in copper that could take the price back to $3 a pound. However, the current weakness in the stock market and the risk-off environment threatens an even deeper decline in the price of the red metal.

A US government delegation will travel to Beijing in the second week of January for trade talks with Chinese officials. The outcome would impact industrial metals. Whatever the China market does is what the copper market does, and early indications are that copper production is down along with a fall in inventories at LME warehouses.

Markets will be faced with many issues as we head into 2019, but if the price of copper experiences increased selling that pushes it to a new low in thin market conditions before end-2018, a buying opportunity in the red metal could arise.

The author is the Head - Commodity Research & Advisory at Anand Rathi Commodities.

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