Why Copper Is Missing Out on the Commodities Rally

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After hitting a nearly four-year high in 2017, copper prices have slumped this year, a worrying signal for the global economy even as stocks, oil and other markets have rebounded.

Prices of copper have fallen 4.9% in 2018, though they climbed Monday and Tuesday to close at $3.1190 a pound. The metal is underperforming the S&P GSCI Index of 24 commodities by its widest margin over the past two decades, other than at the start of 2016, according to an analysis by WSJ Market Data Group of comparable periods.

The gap is a bearish sign for some investors because copper is used to build everything from airplanes to smartphones. Copper’s lag is especially notable because oil has added 19% this year and on Monday closed at its highest level since 2014. Oil and copper are two of the most actively traded commodities, and some investors trade the two together in a single basket.

Some analysts fear that protectionist trade policies will lead to slower activity and ultimately a weaker global economy. That could reduce consumption of materials such as copper. A long-feared economic slowdown in China, the world’s largest commodities consumer, and recent data in Europe and Japan have only compounded those worries.

“Growth isn’t as synchronized as it once was,” said Edward Meir, a strategist at broker-dealer INTL FCStone . “Copper is reacting more to that slowdown.”

Recent Chinese data showed that a closely watched gauge of construction activity rose 7% in the January-April period from a year earlier, less than economists’ median estimate for a 7.4% gain. China accounts for roughly half of the world’s copper consumption, making the metal more sensitive to economic data from the country.

Meanwhile, Japan’s economy contracted in the first three months of 2018 because of weak private consumption and business investment, putting the brakes on the nation’s longest growth streak in 28 years. And Europe’s economic growth slowed to 1.7% in the first quarter, according to the European Statistics Agency, compared with a 2.3% clip in the U.S.

Some analysts see copper’s lackluster performance as another signal that growth momentum has shifted back to the U.S., a trend that has recently pushed up Treasury yields and the dollar and contributed to worries about tighter financial conditions. Higher bond yields tend to make copper and other commodities less attractive to some investors, while a stronger dollar makes them more expensive for overseas buyers.

“You can’t ignore the dents in the bullish argument for copper and the global economy,” said Tyler Richey, co-editor of investment research publication the Sevens Report. “There’s a lot of concerns out there.”

Some commodities bulls think copper prices can rise if economic data pick up and the U.S. and China reach a compromise on trade policies. Treasury Secretary Steven Mnuchin said over the weekend that the U.S. was “putting the trade war on hold,” pushing up copper 2.2% over the past two sessions. Some analysts also think copper is just taking a breather after its best year since 2010, noting that continued gains in oil should lift other materials eventually as well.

Still, hedge funds and other speculative investors have cut net bets on higher copper prices by 75% in 2018, and in March pushed them to their lowest level since 2016, according to Commodity Futures Trading Commission data.

Worries about oversupply have also hurt copper prices, analysts said. While conflict in the Middle East has stoked concerns about lower oil production and thus boosted prices, the supply disruptions from labor-contract renegotiations and other conflicts between miners and host governments—problems that buoyed copper prices last year—haven’t materialized in 2018.

Late last month, the International Copper Study Group, an organization of copper-producing and -consuming countries, said it expects a small supply surplus in 2018, after previously projecting a deficit. The ICSG on Monday also published figures showing there was a slight surplus in the first two months of the year.

“We as a market may have been a little too positive on both the demand and supply sides,” said Peter Kocubinski, portfolio manager and head of commodities at J.P. Morgan Asset Management. He said he still has a positive outlook for copper this year. “We haven’t had the strikes to the degree the market was worried about.”

Corrections & Amplifications
Peter Kocubinski is at J.P. Morgan Asset Management. An earlier version of this article incorrectly stated J.P. Morgan Asset & Wealth Management. (May 22, 2018)

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com


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