Copper Prices Decline as Chinese Factory Activity Contracts and Inventories Rise.

Introduction:

The global copper market experienced a decline in prices as factory activity in China, the world’s largest consumer of copper, contracted at a faster rate than anticipated in May. This downward trend in copper prices was further supported by a surge in inventories, mainly attributed to a shift in China’s economic focus towards services rather than metals-intensive manufacturing and construction. Additionally, Chile, a major copper producer, reported a decrease in copper output. This article examines the factors contributing to the decline in copper prices, the implications of China’s economic slowdown, and the technical outlook for the copper market.

Chinese Factory Activity Contracts, Reflecting a Slowing Economy

 China’s Manufacturing PMI Falls to Five-Month Low China’s official Manufacturing Purchasing Managers’ Index (PMI) unexpectedly dropped to a five-month low of 48.8 in May 2023, compared to 49.2 in April. This decline, below market estimates of 49.4, signified the second consecutive month of contraction in factory activity. Weak domestic and global demand were cited as the primary factors contributing to the downturn.

Non-Manufacturing PMI Indicates Weakening Expansion in Services China’s official Non-Manufacturing PMI, measuring services activity, decreased to 54.5 in May 2023 from 56.4 the previous month. While still indicating expansion for the fifth consecutive month following the easing of pandemic restrictions, the growth rate was the slowest since January. This trend suggests that China’s economic rebound, with a greater emphasis on services, may be losing momentum.

The Surge in Copper Inventories Amidst Market Uncertainty

Doubling of Copper Inventories in LME Warehouses Copper inventories in the London Metal Exchange (LME) warehouses nearly doubled to 100,000 tonnes in the past six weeks. This substantial increase in inventories reflects market uncertainty and a cautious approach by market participants. However, it is worth noting that around 10,000 tonnes were recently designated for delivery, potentially alleviating some oversupply concerns.

 The Shift in China’s Economic Focus Impacts Copper Demand China’s economic shift towards services, which are less metals-intensive compared to manufacturing and construction, has led to a decline in copper demand. The weakening factory activity in China further exacerbates the situation, as reduced demand for copper in manufacturing processes impacts global copper prices.

A decline in Chilean Copper Output in Chile, one of the world’s largest copper producers, fell by 1.1% year-on-year in April 2023, totaling 417,279 tonnes, according to the country’s INE statistics agency. The decrease in production contributes to the overall supply constraints in the copper market. Factors such as labor strikes, operational challenges, and declining ore grades have affected Chile’s copper output.

Technical Outlook and Market Analysis

 Long Liquidation and Price Drop Technically, the copper market witnessed a decrease in open interest by 0.12% to settle at 6639, indicating long liquidation. The prices also declined by 1.45 rupees. These factors point to a bearish sentiment in the market, with sellers outweighing buyers.

 Support and Resistance Levels for Copper Prices Copper is currently finding support at 705.8, and a further decline could potentially test the 702.3 level. On the upside, resistance is expected at 711.3. A breakout above this level could lead to prices testing 713.3, signaling a potential recovery.