Traders are buying copper like never before in what Citigroup says may be a premature rally driven partly by Chinese speculators.
Prices have surged 26% in the space of 15 days and are set for the biggest weekly advance since records begin in 1986. As a gauge of buying and selling shows the metal is the most overbought it has ever been, Citigroup said the “speculative arb-trading” in China is likely to cool, setting up a potential correction in prices by the end of the year.
Copper is on a tear, after lagging behind its peers for much of this year, amid speculation that US President-elect Donald Trump’s infrastructure spending plans will boost demand for the metal. An increase in trading fees and margins on Chinese commodities exchanges is prompting speculators to trade copper on the London Metal Exchange, Citigroup analysts including David Wilson wrote in an e-mailed note.
Despite the recent rally “fundamentals haven’t changed, I don’t think there’s any change in supply and demand,” Mikinobu Ogata, senior managing executive officer of Sumitomo Metal Mining Co, said in Tokyo on Friday. Current prices reflect speculative money flowing into the market, Ogata said. The producer cut its full-year forecast for copper to $4 726 a metric ton, from $5,000 in May.
The metal used in wires and cables climbed as much as 4.5% to $5 850 a metric ton on the LME before trading at $5 829.50 a ton by 4:39pm in Shanghai, a 17% advance for the week. Copper’s 14-day relative strength index was at 92, the highest ever recorded. A reading over 70 suggests an asset is overbought.
The Shanghai Futures Exchange on Thursday raised margin requirements for aluminum and other metals, after trading terms for iron ore, coal and other commodities were tightened by Chinese bourses. While the surge “appears premature” and prices may fall toward the end of the year, stronger-than-expected Chinese factory data, falling global inventories, and additional spending by China on its power network all point to higher prices in the medium term, according to Citigroup.
Goldman Sachs Group was more circumspect. Analysts including Max Layton and Jeff Currie said in a note that copper’s rally could reverse abruptly in the first quarter on a pickup in supply and slowing demand and credit growth in China. The bank favors zinc and nickel in 2017, which are either in deficit or more directly exposed to US stimulus, it said.
More broadly, as global demand prospects and sentiment improve, the bank’s metal forecasts are under review with risks skewed to the upside, it said.
© 2016 Bloomberg