Copper Inventories Expected to Grow as Year Progresses

At the beginning of last week, the price of copper dropped to its lowest in eight months as concerns from traders that a slowing global economy would require less of the metal continued to increase.

The price of copper to be delivered in July declined by more than 2%, hitting $4.10 per pound. Experts believe that the war in Ukraine, COVID-19 lockdowns imposed in China and the rapid increase in interest rates are all affecting the demand for metals and the economy’s outlook. However, toward the end of the same week, the price of the metal bounced back with a new report showing that headwinds will most likely get stronger as the year goes by.

In a new note, Capital Economics stated that the metal hit record highs in the first quarter of the year after low global inventories. Since then, copper stocks have been building steadily and are currently more than 50% higher than they were at the start of 2022.

The increase in inventory has most likely been brought about by flows to the London Metals Exchange. This comes as inventories in China decrease as traders try to make most of the arbitrage window that the premium prices in the country have provided.

However, the gap in prices is almost nonexistent now as prices in London steadily decline. Capital Economics stated that copper stocks on both the Shanghai Futures Exchange and the London Metals Exchange would continue to build in the short term. Capital Economics, an independent economic analysis, forecasting and consultancy firm, also noted that China was currently facing headwinds to growth.

The consultancy firm has lowered its growth expectations for the GDP of various key copper consuming regions, including the United States and Europe. The firm’s view is being driven by its opinion that the growth of output of refined copper in China will remain solid, coupled with a reduction in demand. It expects that copper stocks on both the Shanghai Futures Exchange and London Metals Exchange will end 2022 higher than 2021, weighing on prices.

Capital Economics adds that easing prices of energy will also allow supply to recover slightly, which will be good for metal stocks, including Southern Copper Corporation (NYSE: SCCO).

All this comes as the value of the dollar continues to increase. The currency reached a new two-decade high, which made dollar-priced metals even more expensive for buyers using other currencies. For instance, the yuan dropped to its weakest against the U.S. dollar since 2020, which made metals more expensive in China.

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