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Informist, Friday, Sep 13, 2024

 

By Ashutosh Pati

 

MUMBAI – Expectations of a rate cut by the US Federal Reserve, the rate cut announced by the European Central Bank Thursday, and a drop in inventories are expected to drive copper prices higher by 4% over the next month, according to analysts. However, experts believe a sustained rally beyond October is only possible if the economic situation in China improves.

 

A recent drop in copper inventories at the Shanghai Futures Exchange-monitored warehouses signals improvement in demand from China, Ajay Kedia, director at Kedia Advisory, said. Moreover, as winter approaches, production of copper is likely to fall in China, as the government asks smelters to cut production due to a rise in pollution, analysts said. This would lead to a drop in copper supplies and push prices higher.

 

However, China's economic activities continue to struggle, and experts believe a sustained rally in prices depends on whether Beijing can revive industrial activities going forward. Copper is a leading indicator of economic health as it is used for many industrial, manufacturing, construction, electronic, and other activities. Increased demand for copper indicates a sign of economic growth, while decreased copper usage indicates a slowdown in the economy.

 

Rate cuts by global central banks lower borrowing costs for companies, prompting them to increase their capital expenditure. This, in turn, spurs demand for commodities such as base metals. The US is among the largest consumers of metals in the world.

 

The European Central Bank on Thursday lowered the deposit facility rate, through which it steers the monetary policy stance, by 25 basis points. This is the second rate cut by the European Central Bank this year. Market participants expect another rate cut of a similar quantum in December. The ECB was the first major central bank to cut key interest rates by 25 bps in June.

 

Investor focus will now turn to the US Federal Open Market Committee meeting on Sep 17-18. The CME Group's FedWatch tool shows that Fed fund futures have priced in 55% chance of a 25-basis-point rate cut by the FOMC and 45% chance of a 50-bps rate cut.

 

Goldman Sachs said it has delayed its end-2024 copper target of $12,000 per tn to post-2025, a timing closer to its expected peak in global copper mine production. This implies an average copper forecast of $10,100 per tn in 2025, still above $9,231 per tn this year, but significantly below its previous expectation of $15,000 per tn. "Given the continued weakness in China's property sector, we believe that copper inventory depletion--and its accompanying price rally--will likely come much later than we previously thought," Goldman Sachs said in its report.

 

China's consumer price index, a main gauge of inflation, rose 0.6% on year in August, according to an official statement on Monday. China's producer price index, which measures costs for goods at the factory gate, decreased 1.8% on year in August because of insufficient market demand and the downward trend in prices of some international commodities, it said.

 

Though government policies aim to stimulate the economy, they haven't yet sparked a demand-led recovery, Kedia said in a note. "The deepening deflation in China's producer prices signals weaker industrial demand, negatively impacting base metal prices," he added.

 

Until China starts to fire, demand recovery and price recovery will be difficult, Navneet Damani, director, Motilal Oswal Financial Services, said. "Now they (China) are kind of tweaking their RRR (reserve requirement ratio) rates, along with that incentives to new home buyers and incentives to existing home holders, which is going to at least set the base for copper prices in the near term," he said.

 

Earlier this year, copper prices shot up too quickly, largely anticipating rate cuts, disruption in mines in China, and massive stimulus from Beijing in the third plenum, Damani said. Copper prices on the Multi Commodity Exchange of India hit a high of 945.9 rupees per kg on May 21 and a high of $10,983 per tn on May 20 on the London Metal Exchange.

 

But, the meeting of top Chinese officials failed to provide any major stimulus, and base metal prices corrected very sharply, Damani said. So far, copper prices have fallen by almost 15% on the MCX and the LME from their highs in May because of concerns about demand in China, analysts said. On Sep 5, futures contracts of copper hit a four-week low of 778 rupees per kg on MCX.
   
At 1010 IST, the most-active September copper contract on the MCX was at 802.5 rupees per kg, up 0.5% from its previous close. At 1010 IST, the three-month copper contract on the LME was $9,277 per tn, up 0.7%.  End

 

US$1 = 83.93 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Aditya Sakorkar

 

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