(Bloomberg) -- Copper is coming off the biggest one-day slump in two years and the mood in the market is souring. Even though prices are still up dramatically this year, here are four reasons traders are cautious for the future.
Supply Swell
Copper inventories held in global exchanges remain stubbornly high, even after heavy disruptions to supply from mines in Chile and Indonesia at the start of the year. A large inflow on to the London Metal Exchange was a catalyst in Tuesday’s rout, as it sent a reminder that the market isn’t short of metal.
Loose Spreads
The forward price curve also signals that loose supply conditions may persist in the coming months. Benchmark three-month copper prices are trading at a discount to forward contracts expiring at later dates, a condition known as a contango that’s common in oversupplied markets. That contrasts with zinc, where buyers are paying significant premiums for nearby contracts amid prospects of a supply squeeze.
China Flatlines
Synchronized global growth has been a key driver for industrial metals this year, but concerns are mounting that China’s crackdown on its property market will be a headwind going forward. Physical delivery premiums covering the cost of shipping copper to top user China have been subdued this year, suggesting that the country’s buying needs aren’t placing a strain on supply.
Shanghai Reversal
Copper’s recent selloff has also been partly driven by concerns about a large long position that accumulated in Shanghai Futures Exchange contracts in recent months, Nicholas Snowdon, a metals analyst at Standard Chartered (LON:STAN) Plc, said by phone from London.
Investors are questioning how and when the position will be unwound and have grown cautious about putting on their own bullish bets. The sharp swings in prices seen during SHFE trading sessions on Tuesday suggests that the position is now being unwound, Snowdon said, adding that that could add to short-term pressure on prices.
Copper slumped as much as 4.7 percent on the LME on Tuesday to the lowest in two months. The metal is still up 19 percent this year, the most since 2010, at $6,570.50 a metric ton.
“There could still be a further $200-300 downside from here, but if people see that that position has been scaled back sharply, that could take a lot of the negative pressure off the price,” Snowdon said.
