Down or up ?: China, inflationary fear and possible strike in Escondida inject volatility into copper

The fundamentals of the red metal remain positive, analysts say, although it has registered two consecutive important declines in its price. In any case, it remains above US $ 4.5 per pound.

Copper has been pressured down in recent days on the London Metal Exchange, despite the fact that the fundamentals of the metal, according to analysts, remain positive and the rises should continue to be part of the story in this “boom” that is living the star export product of Chile.

Similarly, copper records two consecutive days of falls, with 3.35% on Wednesday, its biggest daily decline since February, while on Thursday, although the decline was moderate (-0.28%), it touched its lowest level in nearly two weeks. Still, it is still trading above $ 4.5 a pound, an extremely positive price.

At the global level, experts say, one of the reasons that would be pushing the red metal down is directly related to the fears that have arisen among investors about a possible increase in inflation at a global level, as a result of the packages. of stimuli promoted by the Central Banks of the world.

Added to this was the announcement made by China on Wednesday. The main consumer of copper in the world intends to strengthen the management of both supply and demand, in order to face “unreasonable” increases in the prices of raw materials.

Points that, although they have damaged the appreciation of the metal in recent days, analysts rule out that this could lead to a drastic fall. “The market is active, demand is dynamic and supply is also restricted, that is, the fundamentals make prices are at current levels. But since we still have a pandemic that is not controlled, in addition to other risks, that obviously generates uncertainty and volatility in daily prices, “Daniela Desormeaux, director of studies at Vantaz Group, told Emol.

In passing, he highlighted that the latest Copper Market Trends Report, prepared by the Chilean Copper Commission (Cochilco), raised the projection of the average price of the commodity for this year to US $ 4.3 per pound – an annual average never seen above-, due to expectations of a short-term refined mineral deficit.

While Juan Carlos Guajardo, executive director of Plusmining, delved into the factors that have made the price of copper fall these days, ensuring that this is associated with new signs that in the United States “there could be a very strong inflationary trend that force this country to adopt a policy to control inflation and that means raising interest rates. ”

“With this, many risk investments would be affected and today that is an important source of the price rises that raw materials are experiencing,” he said.

In accordance with the above, Michelle Labbé, chief economist at Dominus Capital, explained to this media that “if interest rates start to rise, then what investors do is get out of these assets, because obviously it is better for them to invest in papers with lower risk, that now they are going to start renting more, and that means that, in general, they get out of commodities. ” What, on the other hand, drives the price of the greenback.

Regarding the effect of China’s announcement to seek to contain the rise in metals, Benjamín Castillo, market strategist at XTB Latam, commented that, given that the Asian giant is the main copper applicant in the world, “of course, a perspective that includes less demand is immediately reflected in prices. ”

And he added that it is important “to consider that on Sunday China had bad data on retail sales, which tells us about a lower economic recovery.”

Hidden and political uncertainty of the major producers

The Cochilco study confirmed that there are solid fundamentals that reaffirm the projected rise, due to expectations of a deficit of refined copper in the short term (2021-2022) and reduced inventories in the metal exchanges that are giving fundamental support to the price .

There are also conjunctural factors that could boost the red metal, such as the possibility of a strike at BHP’s Escondida mine in Chile. It should be noted that this is the main copper deposit in the world, and according to Reuters, their union is seeking to achieve a more “fair and equitable” treatment with the company, so they do not rule out starting a strike even longer than the one that occurred in 2017.

Consistent with the latter, Desormeaux stressed that “we are talking about Escondida being the largest private investment in the world – copper-, so obviously to stop producing, and a cut of supply by the mine has an impact on the balance. of the market, then it does have a lot of relevance and it is the parameter “, to which he added that” everyone is looking at Escondida to see how the bonds will be due to the end of the conflict. ”

Added to this, possible new escalations and an increase in volatility are related to the uncertainty that prevails in both Chile and Peru, the two main producers of the commodity on the globe. And it is that while the neighboring nation – the second largest extractor – is heading for a polarized presidential election, our nation begins a long process for the elaboration of a new Magna Carta.

The impact, for Castillo, has to do with the fact that “the current political instability in Chile could lead to a lower supply of red metal, or even less development of future projects for copper. If this scenario occurs, the market could discount a lower future supply and thereby raise prices. ”

Guajardo, for his part, assured that all this context “has to do with the production expectation being affected, either in the short, medium or long term, and how we are expecting a good The demand cycle, if the supply has some kind of limitation, it means that we are going to have a shortage of minerals at some point, and that should be reflected in higher price expectations. That is the link, through the possible impact on supply. ”

All in all, according to Cochilco, world copper production from the mine would expand 2% this year, reaching a production of 21 million tons, with a generalized recovery in the main producing countries. Moreover, in the case of Chile, the institution forecasts a growth of 1.8%, with a production of around 5.8 million tons.

Given these data, the representative of Vantaz Group assured that “the price of copper is still high”, and closed indicating that the falls registered “are part of the volatility, I do not see it as a sudden change in trend.”

Source: Emol

Translated with Google Translator