Despite a strong demand outlook from China, the copper price remains stuck in a narrow trading range, falling 2.0% in October and 2.8% in November. Although the trend has been higher since the start of the year, the market is still uncertain about the future direction. This volatility is driven by concerns over slowing economic growth in the near term. It is also due to increased operational costs for copper producers as crude oil prices continue to rise. The downside risks may already be priced in.
The latest economic data released by the US Fed showed that the economy grew at a slower pace than anticipated, with the Q2 real GDP reading dipping to 0.4% from the previous quarter’s 2%. This decline was accompanied by a substantial depreciation of the U.S. dollar, which contributed to additional volatility. Speculators cut short positions by nearly 8,000 contracts in the week ending Nov. 1, according to the Commitments of Traders report.
While the recent downturns in major markets such as the UK and France have been caused by supply disruptions, they have little influence on the long-term trend of copper price volatility. Global inventory levels remain low and are unlikely to cause further price spikes. However, the threat of a recession to industrial output in Europe is still a concern. Increasing interest rate hikes by the Federal Reserve and other central banks have added to the worries that the global economy may soon hard-land.
As a result, speculators are expected to ease their short bets. The trend followers will buy futures as prices rise, which is expected to boost the international copper price. As a result, the international copper price could begin its recovery in the next few months.
This scenario has been predicted by several analysts. WalletInvestor.com, a site that uses an algorithm to predict the future of prices, has predicted copper prices to reach $8,800 a tonne by 2023. Goldman Sachs, meanwhile, has outlined a “scarcity episode” that will hit by the end of 2022. They also forecast copper prices to reach $10,756 a tonne by 2030. In addition, Fitch Solutions has forecast a small deficit in 2023, but it would grow towards the middle of the decade.
The financialization of the commodity market has been a contributing factor to persistent bubbles. It has been shown that excessive speculation can destabilize prices and can increase the likelihood of a price bubble. It is therefore important to monitor the evolution of price bubble episodes, especially for commodities such as copper. This would allow authorities to implement precautionary policies to avoid a hard landing of the global economy.
In addition, the Fed’s decision to raise rates for the fourth time in less than eight months has increased the pressure on investors to diversify their portfolios. As a result, the investor participation in the copper market has decreased. The downward revisions in global growth forecasts are one reason for the plunge in copper prices.