The price of copper drops as global demand declines sharply

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The price of copper rose to the biggest discount to its futures equivalent in nearly two decades, in a warning sign of a sudden weakening in global demand as China’s economic recovery stalls.

Copper for two-day settlement was $66 cheaper Monday than buying a contract for three-month delivery of the metal, a difference traders said reflected concerns that China’s industrial recovery was not materializing . The gap between the two prices is the largest since 2006, according to the London Metal Exchange.

The sharp decline in the spot price reflects a rapid increase in metal inventories outside China in LME warehouses, as US and European industrial activity begins to slow after a year of rapid interest rate hikes.

Known as Dr Copper for his ability to assess the health of the global market, the metal is widely used in buildings, infrastructure and appliances.

Natalie Scott-Gray, base metals analyst at brokerage StoneX, said copper prices are starting to be driven by real-world signs of weak demand rather than big macroeconomic factors, such as the US dollar and sentiment towards the reopening of China.

“It’s the first physical evidence we’re seeing that demand is being impacted worse than expected in the West,” he said. “It is the pace of change that has caused the divide.”

The price of copper fell 11% in a month to nearly $8,000 per ton, its lowest level since November, in part because China has not grown fast as expected since it lifted its tough coronavirus restrictions towards the end of last year.

Positive sentiment on the reopening of Asia’s largest economy helped major industrial metals climb by more than a quarter between November and January.

“It hasn’t been this bad in many years,” said Al Munro, metals strategist at Marex, a London-based brokerage. “The bullish scenario was all based on a rebound by China that hasn’t materialized as we in the West are suffering from an economic slowdown.”

Slowing production in the West and fading momentum for a Chinese recovery led Goldman Sachs Sunday to revise its forecast for average copper prices this year from $9,750 a ton to $8,698 a ton. He added that metals were “priced for a recession.”

Higher interest rates they have made banks wary of holding onto oversupply of metal due to expensive financing costs, contributing to the dramatic “super-contango” structure in which metal prices for immediate delivery are much cheaper than in the future. As a result, more metal is stored in LME warehouses, which serves as a market of last resort.

The US dollar, which has gained 2% against a basket of six currencies since early May, has also pushed copper prices lower as it has become more expensive for Chinese importers.

At the same time, easing copper supply problems in Latin America and the resolution of a tax dispute related to the large Chinese-owned Tenke Fungurume mine in the Democratic Republic of the Congo boosted supply.

However, some in the market remain optimistic about the prospects for a copper price hike this year on the back of an expected increase in demand fueled by a shift to renewable energy, electric cars and infrastructure upgrades.

Bank of America reiterated its forecast of $10,000 per ton for copper later this year on Monday as China ramps up spending on the grid, which uses the superconducting metal in large quantities.