Copper Prices Set to Rise Amid US Federal Reserve Rate Cut, but Short-Term Volatility Expected

The recent decision by the US Federal Reserve to cut interest rates is sparking predictions of higher copper prices, particularly from Chinese market participants. This optimism stems from expectations that a weaker US dollar will increase demand for copper, especially in the property sector. Historically, copper and the US dollar have an inverse relationship, as copper is priced in dollars, making it cheaper for buyers using other currencies.

On September 18th, the Federal Open Market Committee (FOMC) reduced the federal funds rate by 50 basis points, bringing it down to a range of 4.75-5%. This move marks the first interest rate cut since 2020, and policymakers have signaled that further reductions are likely before the end of 2024. Another 100 basis points of cuts are anticipated in 2025.

Chinese analysts believe this rate cut could encourage similar actions in China, particularly in the property market, potentially driving copper demand. "China is likely to follow the US to lower its borrowing costs especially on the property market, which may boost copper demand from the property market," an industrial analyst told Metalnomist. This development may further bolster copper prices in the medium term.

Copper prices remained relatively stable following the Fed's announcement, with only minor fluctuations recorded on both the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE). Three-month LME copper prices saw a slight drop of 0.2%, settling at $9,382.5 per ton, while SHFE’s most traded October copper contract rose by 0.43% to 74,760 yuan per ton.

Despite these indicators, not everyone shares the same optimism. Some market participants expect copper prices to soften in the short term, as the rate cut had been widely anticipated. “The market has already digested the interest rate cut and copper prices had risen this week,” a trader remarked to Metalnomist. A relatively high SHFE contract price, nearing 75,000 yuan per ton, may also put pressure on downstream producers.

On the supply side, copper inventories in China are declining as downstream producers restock for the Mid-Autumn Festival. The SHFE copper stocks fell from 241,745 tons on August 30th to 185,520 tons by mid-September. This stock drawdown is providing some bullish momentum for copper prices, although some analysts remain cautious about the sustainability of this trend.

Overall, while some analysts are bullish due to falling inventories and expectations of looser monetary policy in both the US and China, others remain skeptical about the near-term outlook for copper prices, citing the market’s earlier response to the expected rate cut.