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Copper prices have dropped from a record high last month following efforts by China to stem the rally in commodities. But supply constraints and growing demand suggest that the industrial metal’s run-up isn’t over yet.
Prices have responded to a rapid economic recovery, especially in China, says Matthew Fine, manager of the Third Avenue Value Strategy portfolios. It also has found support from the prospects for unprecedented global government spending, “with a heavy focus on clean energy and clean transportation—all of which are widely copper-intensive,” he says.
If the clean energy goals that have been announced come to fruition, “it seems very likely that we will experience one of the strongest copper demand growth periods on record,” he says. “Without copper, people can’t improve their quality of life,” and if you want to “advance humanity, consuming copper is not a choice.”
That “favors a large and protracted positive cycle for copper,” says Fine, who isn’t surprised that prices reached an all-time high this year. Copper futures
HGN21,
HG00,
settled at a record high of $4.76 a pound on May 11.
What’s surprising is that “it took the world so long to recognize the looming copper shortage,” he says. “The forecast for shrinking supply, a relatively tight physical market, shrinking copper inventories, and very reliable demand growth were all in place two or three years ago. All of a sudden, everyone seems to have become aware.”
Even so, prices have fallen nearly 8% from their record high last month, following news that China will crack down on speculation and hoarding to curb the recent price rally in certain commodities, and sell some industrial metals from state stockpiles. Coming from a country that consumes more than half of the world’s annual copper output, that’s going to have an effect, and investors are just “waiting to see to what extent China will implement these measures,” says Nick Jonson, senior editor, markets at S&P Global Platts.
Copper moved lower after the Federal Reserve on Wednesday signaled that interest rates will rise sooner and faster than previously expected.
Catching up with copper demand, however, will prove to be a challenge. It takes roughly 10 years to build a new copper mine and years just to expand an existing one, so even if copper were at a whopping $10 a pound, a “meaningful supply response would not be possible in the near term,” Fine says. If copper demand persists or accelerates, it is “already too late” for the mining industry to meet that level of demand, he adds. A “meaningful shortfall” is assured unless demand collapses.
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If copper demand persists or accelerates, it is “already too late” for the mining industry to meet that level of demand.
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World copper mine production was essentially unchanged for three years, according to the International Copper Study Group, or ICSG, though output is forecast to increase by 3.5% this year. Also, after a “significant” 2020 deficit of 600,000 metric tons in world refined copper, the ICSG forecasts a “small” surplus of 80,000 metric tons for 2021.
Supply chain bottlenecks have affected raw material supply, “so even though copper prices have been high, many smelters have not been able to produce it profitably,” says Guy Wolf, head of markets analytics at commodities broker Marex. Also, it has been 10 years since the commodity peak of the previous cycle, and there has been “no material investment in new supply,” he says.
Still, after a four-year period when only two major copper mines were commissioned, the ICSG said there are some major copper mine projects starting in the 2021-22 period.
Record prices for copper have probably led to a new move toward big copper projects, says S&P Global Platts’ Jonson. “There’s greater awareness that we need copper now more than ever.”
