FxWirePro: Stay short in copper price crunch versus lead longs

The copper price should remain under downward pressure over the coming months, as supply growth is substantial and demand growth in China appears to be slowing.  

Significant copper supply growth is being driven by new mines starting up and far fewer supply disruptions than expected so far this year.

With mine disruptions tracking at about 1.9% year to date, this is the lowest since the late-1990s and well below a 5% disruption allowance assumed for 2016.

We estimate that the global copper market balance in 2016 is likely to be in a surplus of 280kt. The stocks ratio is seen increasing to 4.2 weeks at the end of the year, from 3.6 weeks at the end of 2015.

In European trade on Monday copper for delivery in December slipped to a near three-month low after worries about the global economic outlook weighed down the bellwether metal and speculators bet on further weakness ahead. Copper futures exchanged hands for $2.0640 per pound ($4,550 a tonne), down more than 1% from Friday's close and the lowest since June 16.

Today, the copper futures for December delivery gained 0.39% to $2.168 a pound. ETFs follow suit with copper subdued by global concerns.

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.

We consider the recent copper rally to be premature given that copper mining output is increasing which is likely to result in a supply surplus this year. Hence, stay short in Dec-16 LME copper versus Long Dec-16 LME lead, the position to target is for a 15-20% move.