According to foreign media reports: Copper prices recorded a 1.90% increase in the last month of the year. By the end of December last year, copper prices climbed to the highest level since August, leading to mixed industry forecasts for 2024 copper prices. By early 2024, however, copper prices began to fall from their five-month peak. By mid-January, copper prices were still stuck in a prolonged sideways movement. Overall, the copper Monthly Metal Index (MMI) has been trading sideways, rising only 1.34% from December to January.
The copper market is experiencing its worst contango in decades
As copper prices continue to move sideways, the market is already in the widest contango range since the early 1990s. In fact, the LME main spot copper price fell to $109.50 below the futures price in early 2024. Although the spread narrowed a few weeks later, by mid-January it was still more than $100 a tonne.
This deep contango indicates an oversupply in the goods market. This is in stark contrast to the 51,000 tonnes supply gap estimated by the International Copper Study Group (ICSG) for the first 10 months of 2023. In addition, disruptions in copper mine supply have heightened concerns about long-term supply and had an impact on the overall forecast for copper prices this year. The closing of the Cobre Panama mine, for example, affects about 1% of global copper production.
Despite the news of tight supply, stock levels on the exchange have remained strong. While there is little correlation between inventory levels and copper prices, the strong increase in LME inventories in the second half of the year reveals the current downturn in demand. While inventories have slipped slightly since the end of December, LME inventories remain close to their highest level since May 2022.
Copper prices and the US dollar index showed similar volatile movements
While contango persists, copper has yet to break out of its sideways movement. The dollar index also remained consolidated. From December to January, market expectations for a dovish Fed policy at the end of 2024 gradually increased, mainly due to cooling inflation. This contrasts with commodity prices such as copper, where the US dollar index overall trended lower in the fourth quarter of 2023.
However, Fed officials later tempered market expectations for when the central bank would cut rates. Fed governor Christopher Waller noted that inflation is "within striking distance" of the Fed's 2% target. However, he stressed his support for a cautious approach to an eventual shift. "The key is that the economy is doing well," Waller said in an online discussion. This allows us to move in an orderly manner. We can see if changes in the data and progress are sustained." His concern is that hasty policy changes could lead to a rebound in inflation. "The worst-case scenario is that everything goes into reverse after we start cutting rates," he said. As we move into 2024, analysts will continue to adjust their copper price forecasts based on the latest information.
Traders have scaled back their bets on a rate cut, but their outlook for copper prices remains positive.
Comments like Waller's have led markets to unwind expectations about when the Fed will next cut interest rates. This, in turn, supported a short-term rally in the dollar index. According to the Chicago Mercantile Exchange's (CME) Fedwatch tool, the Federal Reserve is widely expected not to change the federal funds rate at its upcoming meeting. At the same time, interest rate traders' expectations for a rate cut in March fell from 76.9 per cent on January 12 to 65.2 per cent today.
As the Fed's moves continue to lead the direction of the dollar index, this could prevent copper prices from moving much higher or lower in the short term. However, if inflation continues to move lower in the coming months and economic data supports a dovish turn, then this could provide enough momentum for the dollar index and copper prices to establish a new trend. For copper, a rate cut could boost its price, which seems to be in line with current market expectations. According to the LME's latest dealer position report, investment funds still held a net long position as of January 16.
