Risks to global demand contributed to a decline in copper prices this year, but the value of the industrial metal may have fallen too far, as supplies look to remain tight for another decade or more.
Visible copper inventories at exchanges globally continue to fall, following a “yearslong downtrend,” says Robert Ryan, chief commodity and energy strategist at BCA Research.
Yet the copper market is also facing a global shortage, he says, with the “biggest impediment” to addressing these physical shortages being a lack of capital expenditure to boost supply. “That’s a chronic problem for copper,” he adds.
In a recent report, BCA Research forecast a physical global refined copper deficit of 595,000 metric tons in 2022, and said copper supply and demand balances will remain tight over the next 10 to 15 years.
A new mine takes 15 or more years to bring on-line, and the lack of massive capex programs suggest the global renewable-energy transition will be delayed, says Ryan. Copper is used in renewable-energy sources such as solar, wind, and thermal power. Russian copper may also face sanctions, taking some of the metal off the market and driving up prices.
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Moreover, despite China’s Covid lockdowns and its property market meltdown, the country’s demand for refined copper still grew more than 3% in the year’s first half, says Ryan.
Copper futures have shown signs of a turnaround after dropping to two-year lows in July. On Nov. 9, the most-active contract
settled at $3.70 a pound on Comex, the highest since August.
Analysts say the recent price rally was partly due to speculation that China may ease Covid restrictions, which have hampered its economic growth, but uncertainty continues to surround China’s zero-Covid policy.
An easing of those zero-Covid policies would likely have a “large and immediate impact on sentiment,” says Matthew Fine, portfolio manager of the Third Avenue Value fund. “Any creeping notion that a global recession may not occur, or an acceptance that life will go on even if a recession does occur, could push copper prices far higher given the existing tightness of the copper market and lack of inventories.”
Prices for the metal gained 7.5% on Nov. 4, the largest daily percentage rise since February 2009. Even so, October marked the seventh consecutive monthly decline for copper prices, and year to date as of Nov. 9, they have lost roughly 17%.
The Chinese real estate market has been in “shambles” since the end of last year, says John Caruso, senior asset manager at RJO Futures, adding that 70% of the world’s copper demand stems from China, and a large portion of that comes from property development. China Evergrande’s financial crisis was “clearly just the beginning of the onset of the slowdown in Chinese real estate and property development,” he says.
Caruso notes that, as a trader, he isn’t ready to make a call on a long-term bottom in copper prices. There may be more “market volatility and economic hardships in front of us globally that could further weigh on price.”
Still, end users of copper may be looking at prices in the low $3 a pound as “potential long-term value,” based on forecasts for longer-term tight supply and demand fundamentals because of the metal’s “vital” role in global decarbonization efforts, including electric-vehicle production, wind, and solar, he says.
Copper in the mid-$2s, meanwhile, is a “screaming long-term bullish opportunity,” says Caruso. The “era of cheap copper prices is fast coming to an end,” he adds, unless other viable sources of conductivity for electrification are found.