US sharemarkets eased on Wednesday. Soft inflation data raised the scope for a rate cut, weighing on bank stocks. Shares of oil producers fell in response to a 4% fall in crude oil prices. Also Reuters reported US President Donald Trump as saying that he had a feeling that a trade deal with China could be reached but again threatened to increase tariffs on Chinese goods if they do not make a deal. After being up by 33 points and down by 90 points, the Dow Jones index closed lower by 44 points or 0.2%. The S&P500 index fell by 6 points or 0.2% and the Nasdaq lost 30 points or 0.4%.

Global oil prices fell by around 4% on Wednesday to 5-month lows. The US Energy Information Administration reported that domestic crude stockpiles rose unexpectedly for the second week in a row, climbing 2.2 million barrels last week. Analysts had forecast a decrease of 481,000 barrels. Commercial stockpiles are at 2-year highs. The Brent crude price fell by US$2.32 or 3.7% to US$59.97 a barrel. And the US Nymex fell by US$2.13 or 4% to US$51.14 a barrel. 

Base metal prices fell by up to 1.5% on Wednesday with lead down the most. But tin rose by 1.3% and aluminium rose by 0.6%.

The gold futures price rose by US$5.60 an ounce or 0.4% to $1,336.80 an ounce. The spot gold price was trading near US$1,333 an ounce in late US trade. Iron ore rose by US60 cents or 0.6% to US$106.50 a tonne.

Wednesday 12 June - close. The Australian share market has closed flat as the heavyweight mining and finance sectors pulled in opposite directions. The benchmark S&P/ASX200 index finished down 2.6 points, or 0.04 per cent, to 6,543.7 points at 1615 AEST on Wednesday, while the broader All Ordinaries was up 4.5 points, or 0.07 per cent, to 6,628.9.

Copper CBS June 2019 — Divergence between price, fundamentals unsustainable

The London Metal Exchange copper cash price dropped from an average of US$6,438/t in April to US$6,018/t in May, and prices have averaged US$5,834/t between June 1 and June 4. The cause of the decline is a shift in investor sentiment among financial participants due to a perceived economic risk stemming from the increase in U.S. tariffs on many Chinese goods and an appreciating U.S. dollar versus the Chinese yuan.

A key indication of this trend is the ratio of copper to gold prices, which has dropped 13.9% from a year-to-June 5 high of 5.11 on April 17 to 4.4 on June 4, the lowest level since June 7, 2017. The fall in the ratio highlights the relative preference for gold as a safe haven in times of economic uncertainty, whereas copper is a commodity that is widely consumed within global manufacturing. Gold prices have traded at an average of US$1,296 per ounce in 2019 through May 31 but have recently traded upward to US$1,334/oz on June 5. This illustrates that much of the effect on the ratio has been declines in copper prices rather than rises in the gold price.

There are signs that this copper price decline will reverse. The net position of LME copper traders has reversed through May from a short position of 326,793 tonnes May 5 to a long position of 101,275 tonnes May 31. This large shift highlights the volatile sentiment that has resulted from the rapidly evolving geopolitical relations between and U.S. and China, particularly among speculative participants on the LME. The shift to a large net-long position illustrates that prices could rise rapidly if financialized sentiment continues to improve.

High-frequency statistics suggest that the key Chinese sectors for the global copper market remain robust. China's Caixin Purchasing Manager's Index remained in expansionary territory to register 50.2 in May, while electricity generation increased 3.8% year over year in April. The floor space of buildings under construction in China has increased by 8.8% this year through April, according to China's National Bureau of Statistics. The Chinese construction sector continues to consume more refined copper following the 9.5% year-over-year increase in real estate investment in 2018.

The Chinese government has also sought to stimulate the economy to manage any adverse impacts of increased U.S. tariffs. The value-added tax for manufacturers has been reduced from 16% to 13%, decreasing the financial burden of U.S. tariffs on China's electrical machinery sector. Additionally, the People's Bank of China reduced its reserve ratio requirement for small to medium-sized commercial banks to 8%, helping reduce the debt burden on the domestic corporate sector.

We continue to calculate that the global refined market will be in a deficit this year of approximately 18,000 tonnes. However, we now expect the September quarter to be more balanced with a slight deficit of 9,000 tonnes, down from a 100,000-tonne deficit in the June quarter. We have changed this expectation due to the return of approximately 2 million tonnes per year of Chinese smelting capacity from maintenance, according to data from China's State Development and Investment Corp. The number of days of global cathode stock coverage across the LME, Shanghai Futures Exchange and COMEX has dropped to 8.1 as of June 4, the lowest level in five years.

The concentrate market is also expected to remain in deficit in 2019. Disruption at Latin American mines has been the main contributor to the tightness throughout this year through June 4. Codelco saw a 17% year-over-year decline in mine output through the March quarter, while Escondida's production fell 13%. As 1.7 million tonnes per year of Chinese smelting capacity ramps up through to 2020, reduced mined output has seen Chinese imports of copper ore and concentrates increase by 16.7% year over year, to 7.4 Mt between January and April. Shanghai Metals Market assesses that the treatment charge for copper concentrate is at US$62/t CIF Shanghai as of June 6, 33% lower than the US$92/t registered at the end of 2018.

The key takeaway is that the copper sell-down may be overdone and appears inconsistent with market fundamentals. Our preferred exposures to playing copper on the ASX remain OZL, MOD, CZI and ARX.

Please contact the desk on +61 8 6169 2668 should you wish to discuss the above in further detail.