Why are copper price fluctuations set to widen?

The current landscape of the copper market reflects a confluence of influences, from political dynamics to macroeconomic policies, each contributing to the complex price movements witnessed in recent weeks. As we delve into the fluctuations, particularly surrounding the U.S. elections, one can easily see how a variety of factors crescendo into significant changes in copper prices. One cannot disregard the role of domestic economic policies or the overarching influence of global trends that dictate supply and demand.

Since mid-October, copper prices have experienced a tightening range, reflecting hesitation and uncertainty among investors. The impending U.S. elections have exacerbated volatility, with prices reacting to fluctuating expectations surrounding the election outcomes. Particularly, during the rise in probabilities favoring Vice President Kamala Harris, there was a minor uplift in copper prices, suggesting market sentiments are closely tied to political developments. However, this was transient; on November 6, copper prices witnessed a notable decline with losses exceeding 4% in just one day. Simultaneously, other major assets responded differently; U.S. Treasury yields and the dollar index saw increases alongside gains in U.S. stock markets, while non-U.S. currencies weakened markedly.

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A critical analysis reveals that policies being proposed by leading parties are pivotal to the demand for metals like copper. Proposals aimed at extensive tax cuts, initiatives to bring manufacturing back to the U.S., investments in infrastructure, and incentives for first-time homebuyers appear beneficial for copper demand. Conversely, preferences leaning towards fossil fuels, halting plans for a "Green New Deal," and additional taxes prove detrimental to metal requirements, injecting downward pressure on demand. Diplomatic resolutions, particularly in terms of stabilizing the situation regarding the Russia-Ukraine conflict, could ease supply constraints, further complicating the effects on commodity availability.

The impact of tariffs recently weighs heavy; since the U.S. imposed taxes in 2018, China's exports to the U.S. decreased significantly. However, a rebound was seen post-pandemic, only for the trend to retract again in 2023 as export figures began to weaken, highlighting ongoing pressures. On an optimistic note, the booming U.S. electric vehicle (EV) market and rapid growth in clean energy sectors have contributed an additional 180,000 to 200,000 tons in copper requirements—roughly 11% of total consumption. Any halt to green initiatives may suppress related copper demand, but such changes may not eclipse the broader trajectory of growth in the renewable industry.

As we make sense of the macroeconomic landscape, it is imperative to monitor upcoming Federal Reserve meetings and the Chinese legislative discussions on fiscal policies. If interest rates can be reduced as anticipated, and if fiscal measures at home are promising or exceed expectations, there lies hope for a resurgence in capital markets favoring copper.

Turning to the industrial sector, current conditions reflect a lack of pronounced contradictions. The global copper market shows less conflict due to an eased raw material supply, while Chinese demand resilience seems to have softened. Conversely, there are positive hints for demand expectations, suggesting slight improvements that could alter the prevailing sentiments.

Supply specifics indicate that expectations for tighter availability are receding too, particularly amid disruptions in overseas smelting operations. Data collected from Chinese ports demonstrate a significant accumulation of copper concentrate inventories since September. This uptick suggests that spot supply has become less constricted, as reflected in the processing fees for copper concentrate, which have gradually normalized.

Focusing on the refining sector, it is observed that since the outset of the fourth quarter, copper smelters in China have ramped up maintenance activities, impacting production capabilities by over 1.5 million tons thus far. Anticipations for refined copper output are on the decline; statistical insights from Shanghai Steel Union indicate a 2.5% reduction in electrolytic copper production in October, with similar declines projected for November. Despite these production dips, demand does not seem to keep pace, resulting in a slowdown of inventory reduction.

In the latest assessments, various factors have contributed to a downturn in apparent domestic consumption of refined copper due to the holiday cycles and the high price of copper, leading to negative yearly growth rates anticipated to be above 5%. Meanwhile, production rates within the copper rod sector are also reflecting lower outputs, failing to meet competitive benchmarks. Yet, as November progressed, optimism arose from marginal increases in manufacturing sentiment in China—both official and private sector PMIs have hovered above growth thresholds, supported additionally by upgrades in housing sales and exchange policies.

However, overseas dynamics present a contrasting picture; expectations for demand in predominantly developed economies remain muted, with the Eurozone exhibiting slight improvement, while most others trend weaker. Emerging markets like India are expanding, but they still represent a smaller portion of the global copper consumption puzzle.

Looking ahead, investors should remain vigilant regarding the unfolding narratives surrounding the Federal Reserve’s monetary policy meetings and potential fiscal strategies from China. Despite expectations of easing supply issues and marginally softening demand, there is still room for optimism as expectations around Chinese demand show signs of tightening. In the short term, copper prices will likely continue to mirror macroeconomic sentiments. Should the Fed's decisions align with anticipated rate cuts, coupled with supportive domestic fiscal policies, the preference for copper in capital markets is likely to strengthen, providing a more solid foundation for prices as the market stabilizes.