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Business Maverick

Copper Suffers Worst Week in a Year on Recession Fears

Copper Suffers Worst Week in a Year on Recession Fears
Molten copper flows into rotating molds during the production of copper cathode sheets in the copper smelting shop at the Uralelectromed OJSC Copper Refinery, operated by Ural Mining and Metallurgical Co. (UMMC), in Verkhnyaya Pyshma, Russia, on Tuesday, March 7, 2017. Russia’s No. 1 zinc miner and No. 2 copper producer plans a far-reaching expansion of its diversified minerals output, billionaire co-owner and Chief Executive Officer Andrey Kozitsyn said in an interview.

Copper reversed losses alongside a broader rally across markets after data showed the lowest reading in a year for longer-term inflation expectations. But the red metal is still set for a 7.6% loss this week, the steepest weekly decline in a year. 

Metal prices endured one of the worst weeks since the coronavirus pandemic began, with economic bellwether copper dropping as much as 3% to below $7,000 a ton earlier Friday. Most other base metals rebounded after falling earlier. Copper is still down about 33% from a record high set just four months ago when metals were soaring on concerns about supply in the wake of Russia’s invasion of Ukraine at a time when consumption remained hot.

Friday’s rebound “seems like a risk on move for copper, following the SPX and some position adjustments,” TD Securities commodity strategy head Bart Melek said over message. “The fundamental picture remains negative.”

Markets have been plagued by two main worries: that Europe will slip into recession due to punishing energy prices and that China’s biggest cities will continue to be locked down due to the country’s Covid-zero policy.

It’s unlikely that China will “enter large scale lockdown measures again, especially as the government moves to set up more available mass testing PCR stations across the country (which should keep a tight tab on any smaller outbreaks),” StoneX analyst Natalie Scott-Gray said in an emailed note. “The industrial sectors should be able to avoid shutdowns; however, the fear here is, that as new variants emerge, while their impact on health is less severe, their speed of contagion seems to grow.”

This comes as central banks around the world raise interest rates to fight soaring inflation.

“The macro environment has definitely taken a turn for the worse,” Bank of America Corp. strategist Michael Widmer said by phone. “Every region has slightly different dynamics, but none of them look particularly bullish at the moment.”

Rio Tinto Group, a major supplier of copper and iron ore, added to warnings on the global economy, calling headwinds in China “considerable” and saying that pressure on global supply chains needs to ease significantly before inflationary pressures soften.

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Metal is on track for worst weekly decline in a year

Copper was up 0.7% a ton at $7,222 a ton by 4:26 p.m. on the London Metal Exchange. It has fallen about 27% this year, heading for the biggest annual drop since 2008, the height of the financial crisis.

Goldman Sachs Group Inc. this week forecast copper to trade at $6,700 in the next three months, a 22% downgrade from its previous outlook. The bank said a surging dollar will remain a headwind to until macroeconomic risks subside.

“Unfortunately, right now trying to locate a hard bottom in copper is proving to be a difficult task,” Phil Streible, chief market strategist for Blue Line Futures LLC, said by phone. “China, rates, recession fears and supply chain issues are still there. The dominoes are falling.”

China’s economy grew last quarter at the slowest pace since the country was first hit by the pandemic two years ago, underlining the impact of a Covid-Zero approach and a prolonged real-estate squeeze. Friday’s data showed no sign of improvement in the slump in China’s property investment that’s sapping confidence in a sector key for metals demand.

Sinking metals prices are also putting mining companies under pressure. Shares of copper producer Freeport-McMoRan Inc. have slid about 40% this year, while Rio Tinto, BHP Group and Glencore have dropped in recent weeks.

Goldman Sachs warned that rising costs are making about 300,000 tons of global copper-mine capacity unprofitable. Capacity that was profitable at $6,270 a ton a year ago now won’t make money at $7,500.

An index of the six main LME metals was down 23% this year through Thursday. Benchmark steel prices in the US have slipped 37%, while iron ore has declined 20% in Singapore.

In other base metals, aluminum prices climbed 0.6% on Friday as smelters in the US and Europe could shut down due to high power prices, tin rose 2.2% while nickel fell 1.5%.

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