Copper: Getting to Elusive $4 Will Take China - And More

• Chinese economic uncertainty keeps halting a copper rally
• The copper-to-gold ratio indicates a slowing global economy and decreasing demand for copper in the short term
• But despite short-term challenges, long-term prospects for copper are positive, with growing demand expected from renewable energy and electric vehicles

Love it or hate it, the relationship between copper and China is a symbiotic one, with the world’s most important industrial metal feeding off its largest consumer while literally building the nation block by block. 

What it also means is that when the Chinese economy booms, prices of copper will follow. And when it slows, well…

Since losing their grip on the psychologically-important $4 per lb handle, longs in copper futures traded on New York’s COMEX have been trying to figure out a direction for the so-called red metal — particularly how long it might take to restore it to its previous glory. 

No one’s talking for now about the $5 record high from March last year. But even getting beyond the $3.80 level, where copper has been boxed since early August, seems harder than thought, so long as the Chinese economy isn’t pulling its weight.

At the center of China's metal consumption is its building and construction sector, which accounts for about 30% of total copper end-use.

COMEX Copper Daily

Charts by SKCharting.com, with data powered by Investing.com

In Tuesday’s early trading in Asia, COMEX copper futures hovered at just above $3.81, up less than half a percent on the day, after seeing sideways trading since the middle of last week on Chinese economic uncertainty.

State media reports said that the People’s Bank of China was considering cutting reserve requirements earlier than expected, a move that is expected to greatly boost liquidity in the world’s largest copper importer.

Chinese officials were also seen touting more fiscal support for the economy as it grapples with a slowing post-COVID recovery.

Data on the Purchasing Managers Index, or PMI, due on Thursday and Friday, is expected to shed more light on China’s business activity, with analysts forecasting a largely weak reading for August.

Copper From a Global Context

The copper-to-gold ratio is one of the stronger indicators of global economic health, directly correlated with economic trends.

When the economy is growing, the demand for copper rises, and investments in gold as a stable asset go down, increasing the ratio. On the flip side, economic contraction results in a rising demand for gold as a “safe haven,” causing the ratio to drop.

The downward trend in the copper-to-gold price-per-ounce ratio points to a slowing global economy as well as a further decrease in demand and a lower price for copper in the short term. Long-term projections from global miners and investment bankers, however, speak of recovery.

The peak of the copper-to-gold ratio was in October 2021. Subsequently, there was another spike in February 2022, followed by a downward trend that continues today.

According to data from MacroMicro, the ratio has been declining from a peak of 0.25 in October 2021 to 0.19 at the beginning of July. In the two most recent recessions, the ratio decreased below 0.16.

After an initial jump this year in early January and reaching approximately $4.23 per lb, COMEX copper started a somewhat steady decline.

This is despite copper stockpiles in Asian warehouses of the London Metal Exchange’s Asian warehouses down almost 80% to 13,950 tons — a level amounting to less than half a day of China’s national consumption.

China’s copper demand remains dampened as its economy is still recovering from the slowdown caused by the pandemic.

Bouncing at between $3.57 and $3.84 pound, the range is similar to what prevailed during the pandemic, suggesting a less optimistic view of China’s demand for copper in the short term.

Ultimately, over the longer term, a copper shortage will likely prevail. Analysts from Citigroup expect more investment into the sector in the future due to the growing demand from the renewable energy industry and electric vehicles.

In the best-case scenario, total demand is anticipated to reach four billion tons by 2025, with the price reaching $6.70 per pound.

However, as the price increases, demand may falter as there will be substantial attempts to substitute other metals for copper in consumer goods and electrical conductors. 

The strong demand for copper in the long term is also supported by continuing investments in new projects being carried out by major global commodity miners with confident outlooks.

According to Bold Baatar, Rio Tinto’s head of copper:

“Overall, there’s a significant copper shortage in terms of the supply deficit that’s coming out of Latin America and the disruptions that are happening in countries like Peru.”

Overall, the long-term outlook for copper remains positive despite the current slowdown in demand.

Future projects planned by large industry players indicate their confidence in the recovery of the global economy and their anticipation of higher prices for the red metal going forward due to the advancement of electric vehicles and renewable energy infrastructure. 

Copper's Technical Path Forward

COMEX copper needs to clear the $3.87 level to move meaningfully forward but also has to stay above $3.50 in order not to risk a test of the still-strong $3 support, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

Said Dixit:

“A break is needed out of the range that keeps the metal trading below the 100-week SMA, or Simple Moving Average, of  $4.02 and above the 200-week SMA of $3.68. Clarity of direction awaits reaction to the 50 Week EMA, or Exponential Moving Average, of $3.87.”

Failure to clear through the 50-week EMA of 3.87 or by acceptance above the 100-week SMA of 4.02 will be seen as rejection leading to the resumption of a downward correction that initially targets the 200-week SMA of $3.68, Dixit said.

“A break and a weekly close below this zone will eventually extend the decline towards $3.62 and $3.54, with the latter being a trigger point for a deeper correction into the 200-month SMA of $3.20, which will be closely followed by the 100-month SMA of $3.10.”

COMEX Copper Weekly

Charts by SKCharting.com, with data powered by Investing.com

On the flip side, a sustained rally above the 100-week SMA of $4.02 will initially target $4.20, followed by $4.35, Dixit added.

“Only a strong acceptance above $4.35 will trigger an accelerated upside momentum targeting the record handle of $5.00.”

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.