Copper prices soared to their highest levels since June 2022, fueled by a declining dollar and anticipation of prolonged monetary tightening in the United States. As traders braced for the impact of these factors, commodity strategists at Citi revised their copper price outlook, outlining the trajectory for the metal in the coming months.
The rally in copper prices, reaching a 22-month peak on Thursday, was propelled by persistent buying from funds, a weakening dollar, and dwindling inventories. Despite the remarkable 13% surge in prices this year, analysts at Citi observed subdued physical demand in China, the largest consumer of copper.
In the London Metal Exchange (LME) trading, three-month copper prices surged 1.3% to $9,705.50 per metric ton, briefly hitting $9,739, the highest level since June 2022.
According to a Macquarie analyst, the prevailing narrative remains optimistic, driven by supply challenges and cyclical improvements in global growth. However, concerns arise regarding the current momentum being largely influenced by financial flows, potentially outpacing fundamentals.
Simultaneously, the most actively traded June copper contract on the Shanghai Futures Exchange closed 2.8% higher at 78,780 yuan ($10,883.02).
The decline in the U.S. dollar index, following comments from Federal Reserve officials signaling sustained tight monetary policy, contributed to the bullish sentiment in copper markets. A weaker dollar typically enhances the affordability of dollar-denominated metals for investors utilizing other currencies.
Hedge funds on the LME notably augmented their net long positions in copper, reaching levels unseen since February 2021. This surge was driven by indications of recovery in China’s industrial sector and disruptions at major mines, which squeezed margins at Chinese processing plants, responsible for over half of the global supply.
Despite the expansion of domestic smelting capacity, China’s refined copper imports surged by 6.9% year-over-year in the first quarter. Additionally, an index tracking China’s manufacturing industry exhibited growth in March for the first time since September of the prior year.
Citi’s Revised Forecast
In a note to clients on Friday, Citi strategists acknowledged that the recent upsurge in copper prices surpassed their bullish forecast of $9,700 per ton. They now anticipate prices to ascend to $10,500 per metric ton in their new base case, averaging $10,000 per ton in the second and third quarters of 2024, as opposed to the previous forecast of $9,500 per ton.
Moreover, in their near-term bull case, Citi strategists suggested that prices could even soar to $12,000 per ton over the same period. They highlighted copper’s role as a forward-looking indicator, attributing its “quasi-equity-like” characteristics to relatively low demand and supply elasticities, coupled with high levels of investor positioning volatility.
Furthermore, the strategists strongly advised corporate consumers to hedge their copper exposures over the next three years or to consider maximizing hedging levels during this ongoing secular bull market, emphasizing the potential to enhance “firm value” through consumer hedging ahead of identifiable secular bull markets.
