Copper prices managed to clock in some gains yesterday, but the metal is still near a monthly low and experts suggest there are tougher times are ahead.
Analysts at Goldman Sachs, led by Max Layton, said in a note on Monday that demand growth in China, which already consumes about 45 percent of all copper, could slow dramatically next year. The team noted that a planned shift away from the red metal towards the use of aluminium in urban electricity grids could spell a slump for copper.
“An increased rate of substitution to aluminium alloy, from copper, is highly likely...the China price of copper is 3.4 times that of aluminium (and substitution becomes profitable at a ratio of 2.5/1),” the investment bank said. “We estimate that between 100kt and 250kt of copper demand could be lost owing to this development in 2016, compared with our base case of 400kt China demand growth in 2016."
The bank placed a target of $5,200/t for the copper price, whereas current LME prices are in the region of $6,000/t.
Meanwhile, on the COMEX division of the New York Mercantile Exchange, copper futures for July delivery had added 0.19 percent to $2.743 per pound as of 07:00 BST today. The contract lost 5.5 percent in May.
The red metal has been pressured by mostly negative figures coming out of China recently.
Investments, manufacturing and economic growth have all logged below-par, and with peak demand season drawing to a close and no significant uptick in consumption transpiring, copper could be in for a slide in June.
“The downstream demand is still fairly limited, we don’t see sufficient or meaningful recovery in terms of fundamentals and sentiment has started to turn,” Xiao Fu, an analyst at BOC International, said as quoted by The Financial Times.
Significantly, experts argue that the Chinese authorities’ economic stimulation measures, such as lowering rates and pumping money into key sectors, are beginning to produce diminishing returns.
“The effect of China’s pro-growth measures on the market is actually receding, besides, the strong dollar and expectation for waning copper demand will also bode poorly for prices,” analyst of Wanda Futures said.
The US Dollar Index closed the month of May for a 2.58 percent increase, and is more than seven percent higher year-to-date.
Investors now eye Friday’s US payrolls data, a preferred metric by the Fed for gauging the health of the US economy. A set of above-par data could boost the greenback ahead of the June 16-17 Federal Open Market Committee (FOMC) meeting.