Commodities are on a roll as the rally spreads from copper to other industrial metals, agriculture, and energy. It’s a positive sign for the global economy as copper is a leading indicator, while energy prices signals strong demand from China and other major importers.
The rally may hinge on how much is being fueled by economic trends versus technical factors and trading dynamics.
Copper illustrates the forces at play, which some analysts think may be petering out while demand weakens, potentially setting up the metal to pull back.
Copper has surged in the last few weeks. The metal recently traded at $4.89 a metric ton after hitting a record peak above $5 earlier this week. It’s up 23% since the start of the year.
The dynamic has several underlying drivers, including a supply squeeze with the U.S. awaiting shipments of copper from South America and Australia. Demand appears robust for things like utilities that are upgrading grids, electric vehicles, and home-building. Analysts say COMEX copper prices may keep rising until shipments of the metal used in the U.S. power and construction industries arrive from South America and Australia.
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But that doesn’t fully explain why prices have surged. A short-squeeze may also be at play. Commodity traders who had taken out large short positions are scrambling to buy physical copper on U.S. exchange
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according to news reports. Traders who had taken those positions had bet against prices rising. Now that those bets have gone wrong, they must deliver the physical commodity.
There are also signs that traders in futures markets don’t see demand holding up. Copper futures that are set to expire next year are trading about 6% lower than front-month futures contract, suggesting that demand is expected to fall.
Because copper closely tracks economic activity in China, falling Chinese government bond yields and other bearish economic pressures mean that $4 copper is more likely than $6, according to Bloomberg Intelligence senior commodity strategist Mike McGlone.
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There is still a bull case. Stronger economic growth, particularly in key metal consuming economies like China, could lend additional support to copper and other commodities, particularly in the London Market Exchange, where copper hasn’t experienced a short squeeze yet.
But most of China’s first quarter’s growth was frontloaded, and newer gauges of key sectors show the economy’s bump has since faded.
Copper has beaten gold this year in the metals trade this year, but its run may be nearing an end.
Write to laura.sanicola@barrons.com
