FxWirePro: Copper shrugs off safe haven sentiment - Stay short Dec’16 LME copper

The recent macro-driven rally in base metals has disrupted the bear market, but we still foresee downside risks to the copper prices from a fundamental perspective in the coming quarters.

Cost deflation continues to sink the marginal cost support levels as the mine supply profile continues to grow despite mine closures announced last year and the weak prospects for demand this year.

Simply put, we believe prices need to move lower to induce more supply adjustments; as such, we forecast that spot prices should dip to average $4,400/t in Q3’16.

We chose to use the early-summer rally as an opportunity to add to this position at a price of $4,904.75/t on July 28 in equal proportion to our original trade (entered at $4,625.50/t), increasing our overall breakeven to $4,765.13/t.  

Whereas the Copper is likely to underperform on rising supply and the slowdown in China. We look ahead for gold to trade higher towards $1,400/oz near-term.

Furthermore, the demand outlook for copper is muted partly because of slowing infrastructure spending growth in China. We forecast the LME copper price to trade down to about $4300 before year-end.

Went short Dec’16 LME copper at a price of- $4,625.50/t on November 19, 2015.

Added to the position in equal proportion at $4,904.75/t on July 28 to increase the breakeven to 4,765.13/t.

Trade target is $4,000/t with a stop at $5,250/t. Marked at $4,841.00/t on Sep. 22 for a loss of $75.88/t or 1.6%. While copper futures for December delivery slipped 0.14% to $2.187 a pound.