Copper analysis: Why hasn't copper skyrocketed in response to China's reopening signals?
10:53, 5 January 2023
Copper, often seen as a barometer of global economic health, has been stuck in a narrow trading range between $3.71 and $3.92 per pound over the past month, lagging behind the so-called "China reopening trade".
Other assets in this particular basket linked with an improving economic outlook in China, such as iron ore, the Chinese yuan (USD/CNH), silver, and the Australian dollar (AUD/USD), have all recently outperformed copper.
In addition, global macro factors, including a weaker US dollar and higher long-term US Treasury yield, have not bolstered the price of the brown metal as many would expect.
Therefore, the factors keeping the copper rally from gaining traction need to be looked into further.
Why isn't copper rallying in tandem with China reopening trade?
Latest Covid and economic news from China
Covid spread dramatically in mainland China when the zero-Covid policy ended in December. The rate of infection has decreased during the previous two weeks, most likely because fewer tests have been performed. China has been accused by the World Health Organization of "under-representing" the severity of its Covid pandemic.
Despite the opaque nature of the Covid spread in China, the worst seems to be over: mobility has bottomed out in large cities, and the most recent policy declarations have been uniformly pro-growth, making the economic outlook for China in 2023 brighter than it was a year earlier.
The central government released the plans to enhance domestic demand in the next years after the December Politburo meeting that set the agenda for the following year's economic strategy. As a result, the Chinese development model will rely more on local consumption than on exports.
The PBoC has announced lowering mortgage rates in cities where housing prices are falling and extended 1st-home loan rate easing in some cities into 2023.
Chinese officials reduced COVID-19 containment measures this week and lifted quarantine for all overseas travellers beginning January 8, 2023. These are clear signs that officials want to stick with the reopening plan and attract fresh capital from other countries.
On the statistics front, the Caixin China General Services PMI rose to 48.0 in December 2022 from a six-month low of 46.7 in November, still indicating contractionary conditions but with an improvement over the previous month. Both activity and new work fell at slower rates, while the outstanding business grew at the quickest rate since May.
What is your sentiment on Copper?
Market positioning has switched bullish on copper
According to the CFTC Commitments of Traders data for the week ending December 27, managed money net bought 605 contracts. The net long position of 14,994 contracts was the highest since December 13.
However, copper prices have risen less than market positioning would suggest, thus indicating that factors other than China and managed money’s sentiment are preventing copper from rallying.
EVs setbacks are preventing a copper price spike
Recent losses in the EVs equity space have offset copper's bullish factors.
Copper is in fact one of the most often used materials in the manufacture of electric vehicles and the electrification of the economy, therefore it will play a key role in the global energy transition.
However, there have been recently some setbacks on that front. During a visit to Thailand, the president of Toyota, Akio Toyoda, expressed caution regarding Electric Vehicles, stating that a "quiet majority" of auto executives dispute if EVs should be the only choice in the future.
Since early December, Tesla Inc shares (TSLA) have fallen more than 40%, and the Global X Autonomous & Electric Vehicles ETF (DRIV), a market index comprising tech giants, automakers, semiconductor businesses, and other EV suppliers, is down 12%.
Tesla's Q4 deliveries underperformed expectations, raising concerns about 2023 electric vehicle demand. TSLA shipped 55,796 China-made electric vehicles in December, the lowest level in five months, a 44% decrease from November and a 21% decrease from the previous year.
Copper prices have thus remained relatively steady, lagging behind the China-reopening rally, as bullish factors (reopening and stimulus in China and a lower dollar) and bearish factors (EVs worries) counterbalanced.
Copper technical analysis
Since early December, copper has been trading in a fairly narrow price range between 3.71 and 3.92 per pound, oscillating between the 50-day moving average and the 200-day moving average.
Copper appears to be having a day of heavy gains in the session of January 5, with the price action attempting to break the 200DMA at 3.82.
In our copper outlook for 2023, I stated that the price of copper would have probably established a new floor in the 4.00–4.10 zone in the first quarter of 2023 if the bulls had succeeded in the breakout of the resistance at 3.94 (November's high).
Copper's $4.08 price level is notable from a technical standpoint since it corresponds with the 50% Fibonacci retracement level of the low-to-high range in 2022.
If the copper rally gains further traction and the 50% Fibonacci barrier is overcome, 4.62, a 78.6% retracement of 2022's range, might be a bullish target for the first half of 2023.
The downside appears to be more limited at this point considering that copper has been trading above the 50DMA dynamic support for more than two months and was trading at 3.42 before Chinese officials delivered the first hints of reopening in November. Therefore, retesting these levels necessitates a dramatic U-turn in China's reopening strategy.
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