Recent volatility in London Metal Exchange (LME) copper prices that saw the benchmark three-month contract briefly move below $9,000/t have signalled the red metal's vulnerability to wider macroeconomic sentiment and currency movement independent of physical fundamentals, and left fourth-quarter price direction less certain than previous quarters.
Copper prices fell to $8,783.50/t on 19 August, down by 6.6pc from the official price on 16 August. This was the first time the metal had been below $9,000/t for four months and followed a strengthening in the US dollar, hawkish sentiment indicated by the US Federal Reserve and indicators showing a slowdown in economic growth in key industrial economies.
Copper subsequently recovered this week, with the three-month contract settling at $9,315.50/t in today's LME official morning session.
Nearby spreads over the past week have also swung into backwardation — a premium of prompt prices to forward values. The cash-to-three-month copper spread on the LME swung to backwardation from contango — a premium of forward prices to prompt values — on 23 August, widening to a backwardation of $20.85/t on 24 August before tightening. Spreads were last in a backwardation of $11.15/t as of 14:26 GMT today.
Supply-side fundamentals, such as labour action at major copper mines and lower production guidance from major mining firms, were swept aside as copper fell to its lowest price since April, suggesting the bellwether base metal's physical fundamentals are not a major driver for its price at present.
Labour action is ongoing at the Caserones and Andina mines in Chile. Mining firm Antofagasta also lowered its copper production guidance for this year, to 710,000-740,000t from 730,000-760,000t, as a result of this year being the driest of a 12-year drought in Chile.
The market received some relief when mining group BHP and unions representing workers at Chilean mine Escondida signed a new collective agreement on 14 August following a nine-day mediation period. Escondida produces more than 1mn t of copper a year and is responsible for about 5pc of global supply.
The US dollar index, which measures the currency against a basket of others, rose to a near-one-year high last week, putting downward pressure on the price of copper at the time.
A slew of indicators signalling a slowdown in economic growth also hit markets before copper's descent to less than $9,000/t, weighing on sentiment.
China's industrial output and retail sales grew at a slower-than-expected rate in July, data released by the country showed on 16 August. Construction sector activity in the euro zone and the EU declined by 1.7pc and 1.2pc in June, respectively, compared with May, due largely to falls in building construction.
The Federal Reserve indicated in its July meeting that it is willing to begin tapering its monthly bond purchases by the end of this year, which would be the first significant easing of the fiscal stimulus that has been a major support of the US' economic recovery from the Covid-19 pandemic.
Minutes from the Federal Reserve meeting released on 18 August indicated policy tightening could happen soon as meeting participants "judged that it could be appropriate to start reducing the pace of asset purchases this year", as progress had been made toward price stability and employment goals.
Eyes will now be on Federal Reserve chairman Jerome Powell's speech on the economic outlook for the US at the annual Jackson Hole event in Wyoming on 27 August. Investors will monitor for any further signals on tapering or upward adjustments to benchmark interest rates.
Purchasing managers' indexes for a range of key global economies are expected to be released on 1 September, giving further insight into the economic recovery and condition of major industrial regions such as China and Europe.
The upward price movement of copper at the beginning of the first and second quarters this year was largely expected, given the strong economic recovery signals and supportive policies from global central banks that were in place.
But price movements heading into the final quarter of this year are less certain. Aside from the potential that stimulus measures could start to be eased, recent economic growth indicators have slowed, raising concerns about whether the level of growth seen this year can be sustained. This has been further exacerbated by the spread of the Covid-19 Delta variant in key industrial economies.
