Copper prices edged down after US President Donald Trump called on Congress to pass a $1.5-trillion infrastructure bill in his first State of the Union speech on Tuesday (January 30).
“I am asking both parties to come together to give us safe, fast, reliable, and modern infrastructure that our economy needs and our people deserve,” Trump said.
Instead of increasing federal spending massively, Trump said in his lengthy speech that every federal dollar “should be leveraged by partnering with state and local governments and, where appropriate, tapping into private-sector investment.”
But many analysts were disappointed at the lack of details provided, and questioned the potential success of the bill. Both Democrats and Republicans have also voiced concerns about the Trump administration’s approach to financing a large-scale infrastructure program.
“It’s a ‘nothing burger,'” Peter DeFazio, the top Democrat on the House Transportation and Infrastructure Committee, told Bloomberg in an interview. “It has to have real investment, not just a bunch of polemics and ideology pretending to be taking major steps to rebuild our infrastructure.”
Meanwhile, copper-focused investors are still wondering whether Trump’s infrastructure plan will impact the market significantly in the next few months.
The red metal is an excellent conductor, and is widely used in electrical wiring — as a result, copper demand is closely linked to increased use of heavy machinery, consumer durables, electrical grids and telecommunications.
“It is too early to say whether this infrastructure plan will have any impact on the copper market,” Yvonne Li, commodity analyst at CPM Group (HKEX:1932), told the Investing News Network (INN) via email. “Unless we know this spending is definitely going to happen, the copper market will still depend much on what is going on in China, the largest consumer of copper,” she added.
Copper prices ended January down 1.6 percent after rallying to a near four-year high in December. Even so, most analysts agree that prices will fall from their current level, as they remain too high compared to what is justified fundamentally.
“We see most of the flows in recent weeks following the dollar, and broader reflation trading and asset reallocation,” ING commodities strategist Oliver Nugent told Reuters.
According to FocusEconomics analysts, the Chinese government’s efforts to tighten credit conditions and ensure financial stability could temper demand and put pressure on prices.
“Mounting Chinese stockpiles of finished goods could put a near-term dampener on metals demand in addition to the expected seasonal slowdown ahead of the new year holiday,” Cormark Securities analyst Stefan Ioannou explained to INN in an email.
That said, there is some optimism that tight supply will offer support to prices. The FocusEconomics analysts also note that “the large number of labor contracts up for negotiation this year could generate price volatility if they lead to fears of strike action.”
Meanwhile, a weaker US dollar could also boost copper, as a softer greenback makes commodities priced in dollars cheaper for investors using other currencies. “Continued dollar weakness may prompt near-term short covering, pushing copper up to $7,415. Combined with the potential for unforeseen supply disruptions, copper could rise to touch $7,535, a level last seen in 2013,” CPM’s Li added.
Looking ahead, firms recently polled by FocusEconomics estimate that copper prices will average $6,651 in Q1. The most bullish forecast for the quarter comes from ABN Amro, which is calling for a price of $7,205; meanwhile, BBVA Research is the most bearish with a forecast of $6,239.
On Wednesday, copper closed up 1 percent, at $7,118 per tonne in London.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.