Copper prices fell from last week’s three-year high on Tuesday (September 12) after a surge in LME warehouse stocks and a stronger dollar put pressure on the red metal.
LME copper fell 1.2 percent, to $6,668 per tonne, after touching $6,970 last week, its highest level since September 2014.
“The move from $6,000 to $7,000 in a month cannot be explained by fundamentals, which haven’t changed and which at this time of the year are normally, seasonally weak,” said Julius Baer analyst Carsten Menke.
Menke isn’t the only analyst who has warned that the recent copper price rally could be overhyped. Other market watchers have issued similar statements, with most pointing to the fact that the jump is the result of short-term factors.
Despite widespread concern, hedge funds increased their net-long copper position to 78,527 lots late last month. On Tuesday, many funds finally cut their bets on higher copper prices, and their net-long copper position fell by more than 8 percent to reach 71,827 lots.
“Copper, really, is riding a wave of speculative fervor,” Chad Morganlander, a New Jersey-based money manager at Stifel, Nicolaus & Co., told Bloomberg. “A pull-back like this shouldn’t be a shock to anyone.”
Supply worries, which were supporting higher prices, have also eased, with top copper producer Chile reporting higher output of 473,544 tonnes in July. In addition, Freeport-McMoRan (NYSE:FCX), which owns Grasberg, the world’s second-largest copper mine, reached an agreement with Indonesia last month to continue operating in the country.
The deal could reduce the risk of further disruptions and may even lead to a “positive surprise” in 2018 mine output, Standard Chartered (LSE:STAN) said in a report.
“Mine production is recovering from disruptions earlier this year. Chile is reporting a growth in output and the issues between the Indonesian government and Freeport seem to have been resolved,” Menke said.
Declining warehouse stocks had also been supporting copper prices, and new data shows that they rebounded this week. Copper stocks in LME warehouses rose 10,300 tonnes to hit 218,725 tonnes, although they are still below this year’s high of 354,650 tonnes.
A stronger dollar is putting copper prices under pressure as well, as a softer greenback makes commodities priced in dollars more expensive for investors using other currencies.
“Today we’re really just seeing copper settling into that lower range. Friday’s selloff was no surprise given how long the market was and it was only a matter of time before the pressure valve was released by some profit-taking,” Kash Kamal, a senior analyst at Sucden Financial, told MarketWatch.
Still, some analysts remain bullish on copper for the rest of the year. Investment bank Goldman Sachs (NYSE:GS) said in a recent note that its technical analysis suggests a copper target price of $7,350, as momentum signals further upside risks.
Similarly, Mercenary Geologist Mickey Fulp recently told BNN that as copper demand grows, the supply shortfall will become larger, with copper prices likely to surface around $3.30 per pound.
Other analysts also see demand rising later this year. In August, upbeat Chinese factory data increased expectations of higher demand from the top copper consumer. Furthermore, BMI Research believes the metal will enter a supply deficit this year that could deepen to 2021.
“Over the longer term, there’s reason for prices to stay this high. Fundamentals are coming in line. The oversupply seems to have been mitigated, at the very least,” said Rob Haworth, a senior investment strategist at US Bank Wealth Management in Seattle.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.