CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.40% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Is the copper bear market rally already over?

06:00, 19 August 2022

Share this article

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
Rows of copper wire skeins being produced in a factory
Copper is struggling to overcome the key resistance areas represented by the 50-dma – Photo: Shutterstock

Five months ago, in early March 2022, copper was trading at about $5.03 per pound. However, this high did not last long, with the base metal having crashed about 37% by mid-July this year, following which it was only able to recover about 16% by mid-August.

In recent times, the industrial metal is struggling to cross key resistance areas, represented by the 50-day moving average. This is largely due to the resurging worries about global economic slowdown as well as concerns about the US Federal Reserve’s continuing aggressive monetary policy tightening.

Copper has only managed to recover about 16% from its mid-July lows 

What is causing the copper bear market rally to slow down now?

China has recently announced disappointing industrial output data for July, which has led to renewed fears of economic recovery in the world’s top copper consumer taking longer than expected. China currently consumes about 52% of global refined copper, while producing about 41%. This has led to headwinds for copper.

The New York Empire State Manufacturing Index also plummeted to -31.3 this month, from 11.2 last month, dropping to an over 2-year low. This highlighted the fact that not only China, but also the world’s strongest economy was seeing a slowdown in manufacturing, mainly due to falling shipments and new orders. This also contributed to a slowdown in copper prices. 

UK inflation has recently touched 10.1% in July, which was a new 40-year high, up from 9.4% in June, whereas US inflation stands at 8.5% in July, having decreased somewhat from June’s reading of 9.1%. This has led to both the Bank of England and the US Federal Reserve to highlight that their aggressive monetary policy tightening is far from over, even as the BoE expects the UK economy to be in recession by December 2022. The minutes from the FOMC’s July meeting are also in line with this.

This has taken a significant toll on copper prices, which are also seen as a fore warner of recession. The second quarter of 2022 marked the worst quarter for metals on the London Metals Exchange (LME), since 2008, due to fears of a global recession, with copper being one of the worst hit, along with tin and aluminium.

However, rising natural gas and energy prices, which are expected to keep rising for the next few months could potentially provide a floor on copper prices. This is due to several smelters already having closed down because of higher input costs, causing a crunch in copper production lately.

China has also unexpectedly cut interest rates, in an effort to help bolster the economy, which is still struggling from the impact of rising coronavirus cases, which could go a long way in helping support copper prices somewhat.

What is your sentiment on Copper?

3.4075
Bullish
or
Bearish
Vote to see Traders sentiment!

Copper technical analysis

According to Piero Cingari, analyst at Capital.com, “A bear market rally that is nearing exhaustion can be seen on the copper daily chart. The price action this week has been unable to break above both the bearish channel and the 50-dma, the RSI has tilted to the downside and the MACD is getting closer to a bearish crossover.

A similar pattern occurred earlier this year, in the first week of June. After a 14% rebound from May’s lows, copper briefly surpassed the 50-day moving average before beginning a severe, steep decline that lasted until mid-July. The RSI and MACD indicators showed similar patterns to what we are seeing now.

Silver

20.46 Price
-1.000% 1D Chg, %
Long position overnight fee -0.0038%
Short position overnight fee 0.0010%
Overnight fee time 21:00 (UTC)
Spread 0.020

Oil - Brent

95.09 Price
+0.700% 1D Chg, %
Long position overnight fee 0.0423%
Short position overnight fee -0.0662%
Overnight fee time 21:00 (UTC)
Spread 0.04

Gold

1,703.96 Price
-0.490% 1D Chg, %
Long position overnight fee -0.0052%
Short position overnight fee 0.0019%
Overnight fee time 21:00 (UTC)
Spread 0.18

Natural Gas

6.93 Price
-0.230% 1D Chg, %
Long position overnight fee -0.1535%
Short position overnight fee 0.1115%
Overnight fee time 21:00 (UTC)
Spread 0.005

Bottom line, copper’s short-term pullback to the bearish channel’s midline in the $3.2-3.3. area seems more likely, given the current technical setup. Breaking decisively the 50-dma and bearish channel resistances would invalidate the thesis and raise the odds of a $4.00 per pound test”

Copper is struggling to cross the key resistance area demonstrated by the 50-dma

copper price chart technical analysisCopper technical analysis as of August 19, 2022 – Photo: Capital.com, Source: Tradingview

What is the outlook for copper for the rest of the year?

UBS (UBSG) has recently slashed China growth forecasts from 4.2% to 3%, citing the effects of Omicron as well as China’s Zero Covid policy on the country’s manufacturing and industrial activity. While the Chinese economy is expected to do better in the third and fourth quarters this year, the recovery is still likely to be quite slow, which is very likely to still keep copper prices fairly subdued.

J.P Morgan (JPM) has followed suit, by slashing its full-year China forecasts from 4.3% to 3.7%, expecting China to continue implementing strict restrictions for the foreseeable future due to the high contagiousness of the Omicron variant of COVID-19. The International Monetary Fund has also slashed China’s growth forecasts from 4.8% to 4.4%.

With China being the largest consumer of copper, this bleak outlook is likely to significantly affect copper prices for the next few months, making it even more difficult for the base metal to cross the key resistance area demonstrated by its 50-day moving average.

However, these losses in copper prices could be somewhat offset by several copper miners slashing full-year copper production guidance lately, due to a number of factors such as droughts, protests and rising gas prices.

Chinese copper miner MMG (1208), owner of one of the largest copper mines in the world, Chilean mine Las Bambas, has recently slashed its annual production guidance from about 400,000 tonnes to 240,000 tons. This was following output dropping about 30% in the first half of the year, due to the mine having been shut for about 50 days on account of ongoing protests.

Southern Copper (SCCO) has also cut its production guidance at its Peruvian Cuajone mine by about 2.8% to 895,800 tonnes, following long-standing protests. Antofagasta (ANTO) also recently lowered its copper output guidance from about 660,000 to 690,000 to about 640,000 to 660,000 for the year. Vale (VALE) and BHP (BHP) have also followed suit with similar guidance.

According to Fitch Solutions, copper could potentially trade at about $9,470 per tonne by the end of the year, whereas Citi (C) believes that it could possibly touch about $10,750 per tonne by 2030. However World Bank has a more pessimistic outlook, with prices expected to rise to about $10,100 per tonne in 2022, but decline for the next few years after that. 

Copper prices will also depend heavily on whether we see a global economic recession in the next few months or not. 

 

Read more

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?

Join the 455.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading