Copper recorded its best week in five years as speculators scrambled to reverse bearish bets following the election of Donald Trump as US president, which boosted hopes for more consumption in the western world.
The promise of a big infrastructure programme in the US, following a decade of reliance on China, has driven the market to reassess the outlook for copper and other industrial metals such as zinc and nickel.
Copper was little changed in the first 10 months of this year on concerns about slowing growth in China and ample supplies, but has exploded into life during November. That led people to put on big short positions betting on declines in the price.
The metal, used extensively in wiring and power grids, has risen more than a $1,000 a tonne this month, wrongfooting speculators and triggering a short-covering rally which petered out later on Friday.
Copper for delivery in three months on the London Metal Exchange was up as much as 7 per cent to $6,025.5 a tonne before falling back to $5,529 a tonne, leaving it on course for a gain of 11 per cent for the week.
However, copper remains well below its 2011 peak of $10,000 a tonne when demand from China drove a decade-long boom in commodities, which was dubbed a “supercycle”.
Rocketing metals prices are a boon for big producers, which include Antofagasta, Freeport-McMoRan, Glencore and Rio Tinto. The rising profitability of their mines will boost cash flow, helping them pay down debt and potentially putting them in a position to resume or lift dividend payments early next year
Although the copper market rebound started before Wednesday’s US presidential upset, Donald Trump’s promise to spend around $10tn in 10 years on infrastructure triggered another wave of buying.
Analysts said copper and other metals were being bought as part of a wider “reflation trade” with investors betting that growth and inflation will rise.
“You’re adding to US demand at a time when copper supply is struggling to grow,” Clive Burstow, a fund manager in the global resources team at Barings in London, said. “And then a lot of what you’re talking about is inflationary, and the age-old reason you hold commodities and miners is that they are an inflationary hedge.”
Between 2000 and 2014, China accounted for virtually all the increase in copper consumption but traders are now more optimistic about intensity of use in the western world if Mr Trump carries through his plans to spend $10tn over a decade on infrastructure.
Mr Trump’s promise to spend $100bn per year is equivalent to around 7 per cent of China’s fixed-asset investment in infrastructure in 2016, according to analysts at Goldman Sachs.
Questions remained about how much copper will be used, given the metal is mostly used in wiring.
“Timing wise, a US infrastructure stimulus is unlikely to kick in until the third quarter of 2017 and would in our view have the largest effect on steel, zinc, and nickel demand,” said Goldman analyst Max Layton.
While copper’s recent ascent can partly be explained by the US presidential election, gains have also been fuelled by heavy speculative buying by Chinese investors.
As the renminbi has weakened retail investors in China have been looking for US dollar-linked assets to buy.
Copper has been one choice and steelmaking ingredient iron ore another. Coal had been a popular play until policymakers introduced curbs to cool prices and speculative buying over the past couple of weeks.
“We saw a lot of Chinese buying coming through — it was orderly until then and now it’s become a little bit disorderly,” said Michael Widmer, an analyst at Bank of America Merrill Lynch. “Views over a potential fiscal stimulus in the US just brought more buyers into the market and drove prices still higher.”
But analysts at Commerzbank voiced caution over the rally, saying there were still risks around China’s credit-driven growth model as non-performing loans rise in the country, the world’s largest consumer of copper.
“Metal prices still appear to be supported by the euphoria exhibited by market participants in the wake of Trump’s election victory, a reaction we find somewhat inexplicable,” they said.
“Even this momentum will run out sooner or later, however. As soon as the dust has settled, market participants are likely to start focusing on the fundamental data relevant to metals again.”