Copper to retest $US10K soon but iron ore prices to remain volatile: Citi

Copper and iron ore prices are firming up amid growing expectations of fiscal stimulus from China and monetary policy stimulus in the US.

Citi says copper could hit $US10,000 a tonne within weeks as markets anticipate a surge in demand from China. Picture: Getty Images

Copper and iron ore prices are firming up amid growing expectations of fiscal stimulus from China and monetary policy stimulus in the US.

After predicting a surge in copper prices earlier this year, Citi commodity strategists said the yellow metal could hit $US10,000 a tonne within weeks as markets anticipate an increase in China’s demand triggered by reforms for power grid investment and renewables.

Bad news on the US economy was potentially also good news for commodities to some extent as Citi’s US “economic surprise index” hit its lowest point in almost two years.

After surging 37 per cent from a February low to a record $US11,104 a tonne on May 20, copper futures on the London Metal Exchange entered a technical correction, falling as much as 15 per cent over the next five weeks.

But copper has been marching up again amid a broadbased rise in commodities including iron ore, crude oil, base metals and metallurgical coal.

Copper rose about 4 per cent in the past four days to $US9912 a tonne. At the same time iron ore futures rose about 8 per cent to $US113.65 a tonne.

“We think China’s energy grid is an obvious focus for further investment to avoid bottlenecks for renewables additions,” said Citi analyst Paul McTaggart.

“More property measures and monetary easing would also be copper supportive.”

China’s Communist Party will hold its Third Plenum meeting from July 15 to 18 amid sputtering economic growth in the world’s second biggest economy.

China is the world’s biggest consumer of most commodities.

However, June manufacturing PMI data suggest headwinds persist for developed economies.

High interest rates, weak or tepid consumer confidence and political uncertainty in an election packed year has “had a pronounced impact on manufacturing sentiment,” says Citi.

“We don’t expect a major turnaround in global manufacturing sentiment before the rate cut cycle commences, our US economists expect a first Fed rate cut in September.”

In regard to the short-term outlook for iron ore, Citi told clients to ‘fade strength’. Picture: Bloomberg

But global copper consumption growth averaged about 4 per cent year-on-year in the first five-months of 2024, aided by resilience in decarbonisation segments. Copper consumption rose 3.3 per cent year-on-year in June, down slightly from the previous month mainly due to weaker cyclical consumption.

“China consumption resilience from EVs and renewables contrasts with a deceleration in ex-China consumption,” Mr McTaggart said. “Weak manufacturing prints for June suggest cyclical copper consumption will likely have weakened last month.”

Bank of America’s head of metals and commodities research, Michael Widmer, said copper mine supply was “extremely tight” after a series of disruptions in recent weeks.

“A rebound in industrial demand, a switch towards restocking, and a Fed rate cut should all bring more buyers to the market,” he said. “Meanwhile, we acknowledge that China’s physical market is weak as demand growth remains subdued this year; grid investment is weaker than last year too.

“Then again, the government is putting more effort into stimulating the economy, so broader support for consumption should be coming through soon.”

But in regard to the short-term outlook for iron ore, Citi told clients to “fade strength”.

“Iron ore prices are likely to remain volatile ahead of China’s Third Plenum but fundamentals suggest the risks are skewed to the downside and we maintain our three-month price target of $US95 a tonne,” said McTaggart.

China’s onshore steel demand remains “muted” with construction and infrastructure activity slowing due to inclement weather and the usual summer slowdown. Steel inventories are increasing while port inventories of iron ore remain high.

China’s steel mill margins continue to be squeezed especially at spot iron ore prices and steel output controls are likely to reduce iron ore demand.

Citi is betting policy measures aimed at addressing the housing glut are unlikely to stimulate incremental steel demand.

Originally published as Copper to retest $US10K soon but iron ore prices to remain volatile: Citi