Copper prices decline amid doubts about China’s stimulus impact

By Ole Hansen, Head of Commodity Strategy at Saxo

Over the past month, a number of economic policy easing measures in China have been announced, primarily through support for the housing market and the banking sector, and, while the initial positive reaction helped drive the Chinese stock market as well as China-dependent commodities such as copper and iron ore sharply higher, more than half of those gains have now been reversed, with traders increasingly questioning the scale and the pace of the announced initiatives. While there has been a clear shift in policy to support a 5% growth target, these rallies increasingly look like dead cat bounces unless fiscal policy shifts more directly to support consumption, which, together with underwater property prices, remain two key factors preventing the Chinese economy from growing at the targeted pace.

The precious and industrial metal sectors have witnessed mixed fortunes this year, with precious metals racing to a 30% gain while industrial metals have returned 8%. However, together with strength in softs like coffee and sugar, these two sectors have supported a year-to-date gain in the Bloomberg Commodity Total Return Index of 4%, thereby offsetting losses across oversupplied energy and grains sectors.

The gold-to-copper ratio is a financial metric that reflects the relative strength of gold and copper. In this example, we use LME copper, currently trading around USD 9,450 per ton. It provides insights into various economic conditions, including inflation, growth expectations, and general market risk sentiment. The year-long rally in gold and recent correction in copper have seen the ratio slump to 3.52, a level last seen in 2020 during the pandemic, when copper prices temporarily slumped, and gold received a boost amid stimulus-led inflation concerns.

Prior to that, the ratio was only this weak in the aftermath of the financial crisis in 2008 when recession and inflation concerns for a short while drove the two metals in opposite directions. Although copper has increasingly become a China demand story, given the fact some 50% of global supply is consumed in China, the falling ratio is nevertheless signalling potential economic distress and a general high level of uncertainty. The latter is supporting gold, given the current focus on fiscal profligacy, safe-havens, geopolitical tensions, de-dollarisation, the US election, and incoming rate cuts lowering the cost of holding bullion for investment purposes.

Based purely on the current direction of travel, the ratio may fall below 3 before finding support, and at unchanged gold or copper prices it would indication a move either in gold to USD 3000 or copper to USD 8000.

Copper prices have gained around 13% so far this year with the bulk of the gains recorded during the first half, when speculators began pre-empting and front run an expected demand pick up supported by China stimulus and the beginning of a US rate cutting cycle. However, a continued rise in exchange-monitored stock levels eventually helped puncture the rally, triggering a price slump in High Grade copper to around USD 4 per pound before bargain buying emerged, only to rally again as the Federal Reserve cut rates and China finally announced a number of stimulus measures.

Having returned to USD 4.30 and the middle of the range seen since June, the short-term outlook for copper will continue to depend on stimulus news from China and as well as market speculation about the timing, pace and depth of future US rate cuts. Our bullish long-term view remains unchanged with solid demand, especially towards the energy transition, potentially creating a shortfall amid miners struggling to increase supply amid higher input prices, lower ore grades, climate change and rising regulatory costs and government intervention. Overall, the uptrend from the 2020 pandemic low looks well established and it would require a weekly close below USD 4 to change that.

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