Fears of sluggish Chinese economic growth and the end of supply disruptions loom over the copper market, threatening to take 10% or more off prices in the coming months, analysts say.
The base metal's price is up more than 7% so far this year, pushed higher by optimism surrounding President Donald Trump's promises of infrastructure spending and a stimulus-driven uptick in the Chinese economy in late 2016.
Now, though, with investors increasingly fearful of a Chinese economic slowdown and Mr. Trump's investment pledges looking increasingly unlikely to bear fruit, those purchases look "over-exuberant," according to Caroline Bain, chief commodities economist at Capital Economics.
"We expect several of the recent drivers of industrial metals -- especially stronger economic growth in China -- to slow going into the second half of the year," Seth Rosenfeld, senior research analyst at Jefferies said.
A "relatively benign outlook suggests there will be little to bolster prices over the course of this year, as optimism about [industrial metals] demand continues to fade," said Capital Economics's Ms. Bain in a note, adding that prices could slip as low as $5,200 a metric ton by the end of the year. London Metal Exchange three-month copper contracts were priced Friday at $5,907.50 a metric ton.
China's desire to rein in public credit growth could hamper industrial metals demand from its property and infrastructure sectors, underpinning a slowdown in broader demand. On top of this, Chinese auto sales growth is expected to fall to 3%, down from 13.7% last year, putting more pressure on metals demand, J.P. Morgan said.
The world's biggest copper customer has seen demand growth slow for some time now.
"China's copper demand growth is no longer 5-10%, it's now 3%, and in the past year or so, it's struggled to get to 2%," said Tom Price, a commodities analyst at Morgan Stanley.
In the medium term, a Chinese slowdown would push copper prices toward $5,000 a metric ton, J.P. Morgan said in a note.
Those forecasts of a drop in prices might have come sooner in the year if copper had not found support from supply-side problems. Prices were bolstered in the first months of 2017 by disruptions at the world's two largest copper mines -- BHP Billiton's Chilean Escondida operation and Freeport McMoRan's mine at Grasberg in Indonesia.
"Those supply disruptions kept prices higher than we had initially thought," said Carsten Menke, a commodity research analyst at Julius Baer.
The effects of those supply interferences are now played out. "The first quarter was a world of pain for copper, but now we've seen supply normalize. Plus, trade tends to be weaker in the second half of the year than in the first half anyway," Morgan Stanley's Mr. Price said.
With China's ruling Communist Party due to hold its 19th National Congress and switch its current Politburo committee in October, demand growth for the broad industrial metals complex will likely be under close scrutiny, particularly when held against increasingly tough comparatives, Jefferies's Mr. Rosenfeld said.
"While there is a limited risk of the economy sharply slowing through the party congress, strong demand growth in the second half of 2016 and the first half of 2017, will see relative growth slow," Mr. Rosenfeld added.
Write to David Hodari at David.Hodari@dowjones.com
(END) Dow Jones Newswires
July 01, 2017 07:45 ET (11:45 GMT)