Copper slumps as trade conflict clouds global growth outlook

The price of copper continues its freefall this week, falling to a nine-month low of $6,450 per tonne on the London Metal Exchange and to an 11-month low of $2.874 per pound on New York’s Comex. The popular base metal has been under pressure since trade tensions first started brewing in late February.

Copper is considered to be a good indicator of global economic growth due to its wide use across the construction, industrial and technology sectors. The fall in price therefore to multi-month lows this week could be a sign that investors are becoming less confident about the global growth outlook amid rising fears of a trade war.

After rallying by over 50% between 2016 and 2017, copper prices have been consolidating for much of the year as growth in the world’s major economies moderated. Supply disruptions pushed prices to near 4½-year highs in June, with Comex futures reaching $3.2970 per pound on June 7. However, as the US stepped up its confrontation with China over trade, the metal has since plunged by 13% on fears that the deepening row is weighing on business sentiment.

While the range of products covered by the tariffs are limited for the time being and are not likely to have a major impact on growth, the prolonged stand-off and the threat of additional tariffs from tit-for-tat action is starting to dampen firms’ morale and affecting investment decisions. Lower growth would be negative for copper and other base metals, as well as for commodities in general as it would dampen global demand. Copper could be especially hurt from a potential full-blown trade war as China – the world’s biggest consumer of copper – is Washington’s main target and could face even stiffer levies on its exports to the US should the Trump administration persist with its tough stance.

Should the Sino-US trade dispute escalate further, copper could be headed for steeper declines. Although the overall strong health of the global economy should support demand even in a scenario of worsening trade relations, prices could still see large swings in the short term. Comex prices are likely to find immediate support at the 38.2% Fibonacci retracement of the October 2016 – June 2018 upleg around $2.83. A drop below this area would turn the focus to the 50% Fibonacci around $2.70. A breach of this support would signal a shift of the current neutral to bullish outlook to a bearish one.

However, in the event of an easing of trade tensions, with the US and China pledging to seek a compromise solution to their differences in trade policy, this would provide a boost to commodity prices. Copper bulls could set their sights on the $2.94 level as an initial upside target. A break above this level would open the way to the 23.6% Fibonacci just above the key $3.00 mark. Further up, the next obstacle could come from the 50-day moving average around $3.08.