A combination of slowing global economic growth and extreme hedge fund bearishness has shoved the copper price well below $3 per pound, after a multi-year period of stability. 2015 is less than a month old, yet the copper price has already declined a remarkable 14.4 per cent.
Bank of Montreal mining analyst Jessica Fung writes that the sharpness of the decline is caused by Asian-based investment funds selling the metal, and while "[while] a short covering rally is possible, overall BMO Research is negative on copper this year due to forecasts for a 450 [kiloton] surplus market."
Ms. Fung notes that copper industry fundamentals are also deteriorating. "Inventories are rising, premiums are declining and the scrap discount is reportedly widening."
Futures data indicates that hedge funds are well aware of the weakening outlook for copper and have rapidly placed bets against the commodity price. The chart below shows that the net non-commercial (investment funds) futures positioning in copper – the number of contracts benefiting from rising prices, minus outstanding put contracts – is now hugely negative.
Consensus forecasts for World GDP, Copper
SOURCE: Scott Barlow/Bloomberg
The bearish bets by hedge funds helped drive the copper price lower, but the increasingly weak global economic outlook is likely the larger culprit. The second chart shows that the copper price forecast for 2015 has declined in accordance with global growth expectations.
SOURCE: Scott Barlow/Bloomberg
As Ms. Fung notes, there could be a short covering rally in copper that temporarily boosts the commodity price. But a sustainable recovery in copper prices, and profit growth for copper mining companies, is highly unlikely unless the global growth outlook begins to improve.
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