Citi with the take. This argument is a good proxy for all metals, especially iron ore. I will only add that as Europe and the US stall, Chinese growth will be hit even harder on the trade shock.
Today we introduce a pair of metals trade recommendations. We have been bearish on copper since May 2022 and see a further 15-20% downside over the next 6-12 months to $6,600/t in our base case, reflecting a particularly bearish European demand outlook, and to a lesser degree strong mine supply growth during 2023. We recommend producers hedge and investors get exposure to the downside. To highlight our conviction in this view, were commend (and open here) an LME March 2023 copper put option position with $7,000/t strike for an approximate option premium of $302/t (see Figure1). Other bearish implementations might be considered depending on your circumstances, such as outright copper futures or employing zero cost collars. Note: Futures trading involves substantial risk of loss.
The ongoing commodity shock in Europe looks set to be larger than the first oil shock, as a share of GDP — Commodity consumption costs in OECD Europe are estimated to have increased by over $1.6tr since pre-COVID (annualised run rate based on July data), equal to a delta of ~7% of GDP. By comparison, global commodity costs increased by ~5% of world GDP during the first oil shock in the early 1970s. We expect that the impact of this commodity shock will be more fully felt by households and corporates over the next 6months or so, given lags in pricing pass through.
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