The Copper MMI (Monthly Metals Index) traded lower this month, falling one point for a February reading of 87. The fall was driven by a slight retracement of copper prices, which had skyrocketed in December. In January, LME copper prices fell by 1.21%.
Despite the price retracement, LME copper prices held above the $7,000/mt level at the beginning of February, and fell below this level during the second week. Trading volumes still support the uptrend. Copper prices could continue their rally.
Source: MetalMiner analysis of FastMarkets
Labor Disputes Could Threaten Copper Supply
Mine strikes continually threaten copper supply. BHP’s Escondida mine, the world’s largest copper mine, failed to develop a new labor agreement in advance of formal negotiations, scheduled for June. Last year, a 43-day strike at the Escondida mine impacted copper supply.
Since BHP’s Escondida copper mine produces around 5% of the world’s copper, it’s easy to see the impact of strikes on LME copper prices.
Meanwhile, Glencore (LON:GLEN) forecasts its own copper output to increase by 150,000 tons at its Katanga mine in the Democratic Republic of Congo.
U.S. Dollar, Copper Back to Negative Correlation
Copper and the U.S. dollar maintain a strong negative correlation. The negative correlation gives the direction of the trends; when the U.S. dollar is weaker (downtrend), copper prices are stronger (uptrend).
The negative correlation did not hold during the first six months of 2017, nor did it hold for commodities and the U.S. dollar. However, the historical negative correlation has reappeared, as copper prices and the U.S. dollar now trade in opposition to one another.
The U.S. dollar in black. Copper spot prices in purple. Source: MetalMiner analysis of StockCharts
The U.S. dollar traded sideways during Q3 2017. Many analysts (not MetalMiner) started to believe the U.S. dollar had reached a bottom.
MetalMiner, however, remained more bearish on the U.S. dollar, as the dollar did not give any clear signs of a trend reversal. The distinction between a short-term trend that could impact prices in one to three months, versus a long-term trend, which could actually impact a buying strategy becomes important. The fact remains, the U.S. dollar has fallen to a more than three-year low.
Copper Scrap vs. LME Copper
In January, copper scrap prices did not move with the LME copper price. LME copper prices fell slightly, while copper scrap prices increased by 2%. Therefore, the spread between the two decreased slightly this month. We can expect these types of divergences in the short term, although the two tend to trade together over the longer term.
Source: MetalMiner data from MetalMiner IndX(™)
In January, several Chinese copper scrap restrictions went into effect. The Ministry of Environmental Protection announced that only end-users and copper scrap processors will be allowed to import. This restriction in effect removes Chinese traders from the copper scrap market.
What This Means for Industrial Buyers
In January, buying organizations had some opportunities to buy some volume. The weak U.S. dollar and strength of other base metals support the bull narrative for copper. As long as copper prices remain bullish, buying organizations may want to “buy on the dips.”