Copper and cotton crushed on galloping recession fears

By Ole Hansen, Head of Commodity Strategy at Saxo Bank

The month-long commodity rally hit a major obstacle during the latter part of June as the risk of recession continued to take hold in people’s minds. With the war in Ukraine, China still struggling to find a growth gear amid its controversial zero tolerance approach to Covid outbreaks and the wider world, led by the US responding to the negative impact galloping inflation has on consumers’ propensity to spend, the outlook has indeed worsened.

The two major performance outliers this past month are natural gas in the US and Europe. Stateside, the Henry Hub natural gas contract has slumped by 34% to $5.7/MMBtu as the prolonged shutdown of the Freeport LNG export terminal keeps more gas at home, thereby supporting a faster-than-expected inventory build ahead of the winter peak demand season.

Reduced US export capabilities could not have come at a worse time for Europe where reduced flows on the NordSteam 1 pipeline to Europe has further uprooted the market and driven prices to a demand destructive territory just below €150/MWh ($46.5/MMBtu), around a ten-fold higher price than seen in the run up to last year’s surge. The economic impact on European utilities not receiving the gas they bought under long-term contracts with Gazprom at much lower prices is currently being felt the hardest in Germany, a country whose failed strategy to depend almost exclusively on Russian gas has left many high energy consuming industries exposed.

Copper and cotton crushed

Behind the mentioned big drop in US natural gas we find copper and cotton as the biggest losers in June. These two commodities from a different sectors are often used as barometers of the health of the global economy. The level of demand for copper given its use in electrical wiring and cotton in clothing are two key components that drive global growth, and with rising concerns about a global recession, both have been attacked by sellers, either getting out of long or into short positions as a hedge against further macroeconomic deterioration.

While copper crashed below levels not seen since early 2021, cotton hit a nine-month low, some 32% below the May peak, with Covid-hit China seeing lower demand. Against these challenging demand developments, the outlook for supply also worsened after the percentage of US crops being rated good to excellent dropped to just 37% versus 52% a year ago.

Once the dust settles, copper is likely to attract fresh demand, not least because China is showing fresh attempts to ease lockdowns while the level of available stocks held at warehouses monitored by the two major exchanges in London and Shanghai remain near the lowest in decades. Not a healthy starting point from any signs of a renewed pickup in demand.

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