Copper Bulls Tested as Rampant Inflation Risks Destroying Demand

(Bloomberg) — Copper bulls are facing a test of nerves as investors across financial markets focus on the risk that China’s Covid crackdown could combine with wider inflationary shocks to bring global growth to a grinding halt.

Most Read from Bloomberg

Prices for the metal known as an economic bellwether fell almost 9% over a rolling 10-day period this week on the London Metal Exchange, the steepest decline since March 2020. The drop comes as China struggles to rein in flaring Covid-19 outbreaks and some advanced economies tilt toward recession.

Chinese lockdowns could also curb supply, but copper’s rapid descent signals investors see greater risks on the demand side for now. Prices are down 13% from March’s record high as the focus shifts from the copper market’s tight supply dynamic to fast-mounting risks to the world economy.

“A week ago everyone was talking about the upside opportunity in copper, and now all the discussion is about the downside risks,” Duncan Hobbs, an analyst at metals trading house Concord Resources Ltd., said by phone from London. “There’s been a complete pivot in sentiment.”

In Europe, physical traders and major manufacturers are still reporting buoyant demand. However, factories are facing dual headwinds from a surge in energy prices and shortages of key parts that have forced some plants to shut down. Beyond the supply bottlenecks, an unexpectedly large slump in Germany factory orders and industrial output this week has also sparked jitters about the outlook for end-use metals demand.

“If you are in search of bad news, just have a look at German macro data,” Carsten Brzeski, global head of macro research at ING, said in an emailed note. “We continue to expect a contraction of the German economy in the second quarter.”

Manufacturing gauges in the US still signal a strong expansion at the industrial core of the world’s top economy. But the threat to growth posed by rising interest rates and rampant inflation has sparked a firestorm across financial markets this week, with bonds and stocks tanking and the dollar surging as investors seek safety in cash. The dollar’s sharp rally comes as currencies and bond prices slump in emerging markets, heaping pressure on manufacturers who need to pay for copper and other commodities in dollars.

Copper traded at $9,440 a ton on the London Metal Exchange, set for a 3.3% weekly drop and a fifth straight weekly decline. The metal notched a record high of $10,845 a ton in March, but is now trading down 3.2% this year.

too expensive

Other metals have also been caught in the downdraft, with aluminum falling more than 20% from a March high, as surging prices for other commodities hammer household budgets and pile pressure on industrial buyers in areas like car-making and construction.

“We are concerned about the inflationary pressure that we see in the US and Europe with high energy prices,” Hilde Merete Aasheim, chief executive officer of aluminum producer Norsk Hydro ASA, said on Bloomberg TV. “We could risk a recession in the sense that commodities or products simply get too expensive.”

Even in areas where demand prospects look the brightest, raw-material inflation is posing a headwind to growth. Battery metals, including lithium, cobalt, and nickel, have spiked this year, threatening to erode margins for makers of electric-vehicles, and increasing prices for consumers already facing a surge in costs for essential items from food to power and fuel.

“We have to monitor that closely, and it puts pressure on the whole equation,” Volkswagen AG CFO Arno Antlitz said on a call with reporters on Wednesday, commenting on the recent surge in battery-metal prices. “We try to offset the increase in raw materials as much as possible, but we can’t rule out that there might be additional price steps in future in order to secure the margin.”

Copper still has plenty of stalwart supporters who say the market is critically tight, with inventories at perilously low levels and the risks to supply growing. They say investors are fretting over demand risks that are yet to be realized, while Thursday’s sharp but short-lived rebound showed betting on further falls is also risky.

Lessons from China’s first lockdowns suggest government restrictions could also impact supply by causing deep and long-lasting turmoil for smelters and shippers. And demand may snap back more readily, aided by massive government stimulus.

Russian exports have also been hamstrung since the start of the war in Ukraine, and some major consumers are vowing not to buy the metal that is flowing out, due to concerns about indirectly financing the conflict. That’s creating tension in Europe, where the premiums consumers pay for spot metal are rising meaningfully for the first time in years, suggesting buyers are facing a rare shortfall in supply.

Whether supply or demand ultimately gets hit hardest remains to be seen, but the rapid and critical shifts on both sides of the scale look likely to spur increasingly chaotic trading conditions in futures and physical markets. That will spring traps for bulls and bears alike.

“There was a lot of confidence about the outlook in Europe at the beginning of the year, but people are more uncertain about the outlook now,” Concord’s Hobbs said. “But it’s important to note that while the risks to demand are real, they’re mainly still just risks at the moment.”

Most Read from Bloomberg Businessweek

©2022 Bloomberg LP

Leave a Reply

Your email address will not be published. Required fields are marked *