Copper price outlook: spread widens to a 27-year high

Copper price remains on an uptrend despite Monday’s pullback. The tight market has placed the red metal in good shape to retest its all-time high of $4.8820.

Demand outlook

Monday’s copper price pullback was a reaction to China’s reduced economic growth. Data released by the country’s National Bureau of Statistics showed that the country’s GDP rose by 0.2% in the year’s third quarter compared to the forecasted 0.5% and previous 1.2%. At the same time, industrial production in the Middle Kingdom increased by 3.1% YoY, which is lower than the analysts’ estimates of 4.5% and prior 5.3%.

The economic data is a reflection of the uncertainties in its real estate sector following the Evergrande saga. As part of its main uses, copper is largely used in the construction industry. Besides, China is the largest consumer of the red metal and other industrial metals. As such, hitches in the real estate sector and economy in general are bound to exert pressure on copper price.

Interestingly, China’s slowed economic growth is at the center of the differing outlooks on copper. One the one hand, some analysts have cited the ongoing energy crisis as one that will fuel a supply crunch thus boosting prices. From this perspective the lessened economic momentum is but a headwind.

The tightening supplies have further substantiated the bullish thesis. In the London Metal Exchange (LME), the spread between cash and 3-month futures widened to the highest premium since 1994. Since the beginning of October, the spread has widened considerably as demand increases at a faster pace compared to supply. A significant increase in orders has had LME-monitored warehouses record a shrinkage in inventories by over 90% in the past 2 months.     

Alternative outlook

Despite the bullish outlook held by most analysts on copper price, some experts are of a different opinion. Citigroup, which was bullish on the industrial metal earlier in the year, has warned that the prices may drop by 10% over the next three months as demand dwindles. Besides, the International Monetary Fund (IMF) has pointed that economic recovery was the key driver of the copper price rallying in May when it hit its all-time high. While citing the reduced momentum, the institution’s outlook signals that copper’s path may not be as rosy. The outlook is founded on the role of the metal as a bellwether for economic growth. A slowed-growth environment tends to exert pressure on copper price.