Copper, whose spot prices were higher than the three-month futures in the LME — a price pattern known as backwardation — due to the panic over tight supplies since July (premium for cash hit $40.25 on September 18), has returned to contango (cash at discount to futures). Traders of the red metal need to be cautious on their open positions in the next few days. On Friday close in the LME, cash was at $1.45 discount to the three-month forward.

The rally in metal prices, especially of copper, was on optimism over Chinese buying. Inventories were drawn out of the LME to feed the dragon’s demand stemming from the stimulus spending of the State; but now it appears that some of the large traders over-bought and their stocks are on the way back to LME warehouses. Also, domestic production in China of different metals, including copper and aluminium, increased sharply in August. So the dragon’s demand for these metals from global market may now drop.

Also, with the US dollar making a comeback with vengeance (the dollar index, which dropped from 102.8 in March to 92.3 in August, has now inched close to 95), there are reasons why gains of metals are going to chip-off.

Copper, which rallied about 50 per cent since March, is down about 10 per cent from the high in mid-September to $6,545 per tonne now. Similarly, aluminium, nickel and zinc, too, have corrected from their highs.

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Weak outlook

Copper futures hit a high of $6877.50 per tonne in mid-September in the LME. This was fuelled by the drop in the US dollar as also record levels of import by China. Between January and July, China’s cumulative copper imports increased by about 40 per cent, year-on-year. Prices were also fuelled by the news of mines in Chile and Peru shutting operations due to the Covid-19-led lockdown.

That said, there has been some sanity returning to markets. In August, China’s imports reduced month-on-month, as per customs data. While one reason for this drop could be that LME prices no more trade at discount to the SHFE (Shanghai Futures Exchange), there is also a drop in demand because of the large buying and stocking in past few months. In the week ending September 25, copper stocks in SFHE warehouses reduced for the first time in many months.

Thus, there is likely to be a cool-off in the price of copper in the coming weeks. The recent escalations in the US-China trade tensions and the increasing cases of Covid-19 infection can add to the downside pressure on the red metal.

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