You may have noticed that copper has been in the doghouse lately, but fear not, there’s a path back to growth.

Copper, largely an analogue for manufacturing data has been suppressed lately by, you guessed it, underwhelming manufacturing data.

For example, recently the Caixin China manufacturing purchasing managers index fell below 50 — a sign that factory activity in China was in contraction.

But that’s not to say that it can’t rebound.

Here’s what needs to happen for it to do so.

1. A resolution to trade tensions

While Xi Jinping and Donald Trump have called somewhat of a detente on the ongoing trade skirmish, but analysts aren’t so sure their meeting at the G20 recently drew a line under the tensions.

Some sort of sign that the tit-for-tat tariffs aren’t only being paused but wound back would provide traders with confidence.

That’s because China is a huge manufacturer, and the market sees China losing more than the US in any protracted battle.

The theory is that if China loses, manufacturing levels will go down. So if the trade war ends…

2. Massive Chinese stimulus

Should the trade war flare back up or China run into other economic difficulty, there’s a line of thinking that China could order more domestic construction — and that would mean more copper.

READ: Could China move to stimulus?

While the scale of the stimulus would be lower than the credit-fuelled expansion which caused the mining boom in Australia, it would still be welcome.

More buildings need more wire, and wire is made with, you guessed it, copper.

3. The market cottons onto the undersupply in the market

The copper market has been in undersupply, but according to analysts this hasn’t really had a material impact on copper futures — with traders more focused on the geopolitical picture rather than the very real market condition.

It’s why several analysts think copper’s upside is effectively building underneath the trade tension.

READ: Why copper’s upside is being ‘baked in’

For example, while the forecast for this year was for 3 percent of the world’s copper supply to be impacted by weather or industrial action (notably in Chile), analyst Colin Hamilton says this is now more like 5 percent.

With the expected undersupply of copper almost doubling, the question has to be asked about when analysts will swing back to focus on the micro of copper instead of the macro.

Should they do so, expect upside.

 

This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.