Copper is set to finish the year as the top-performing industrial metal, as a series of production disruptions squeezes the supply of a commodity used in power lines, cars and household appliances.
A recent price spurt following mine supply problems in Latin America, coupled with signs of improvement in the Chinese economy, have put the red metal up 2.5 per cent so far this year at $8,600 per tonne.
The closure of a giant mine in Panama and a severe downgrade in Anglo American’s forecasted copper production in recent weeks have contributed to removing 750,000 tonnes or 3 per cent of global supply next year compared with previous estimates, according to Bank of Montreal. Vale and Rio Tinto also recently gave production forecasts that fell short of some analysts’ expectations.
Traders had been betting on increasing supply at copper mines in the Democratic Republic of Congo, Peru and Chile to outstrip demand next year, but they now see the market being tightly balanced.
“Only two months ago, expectations for 2024’s copper market were decidedly downbeat,” said Colin Hamilton, managing director of commodities research at BMO. “The prospect of a bad year for copper has now disappeared.”
Copper’s comeback in 2023 has taken place against a challenging backdrop for metals during one of the most aggressive campaigns of interest rate rises in the US Federal Reserve’s history and as the Chinese economy failed to rebound strongly from Covid-19 lockdowns.
High interest rates pushed up the dollar, in which metals are priced, with the dollar index up more than 3 per cent year-to-date by early October, making commodities more expensive for importers. Higher borrowing costs have also led to a pullback on capital-intensive investment and elevated financing costs to hold metal stocks, which prompted manufacturers to reduce inventories.
Those bearish factors also helped to exert downward pressure on aluminium, lead and zinc, putting base metals on track to be the worst-performing commodity sector for a second year running.
Tin was the only other of the six major industrial metals besides copper to rise this year after the suspension of mining in a key region of Myanmar, the world’s third-largest producer, outweighed the hit to demand.
Nickel, however, had a torrid year due to surging supply out of Indonesia and the increasing conversion of low-grade nickel products into a high-quality metal that can be delivered to London Metal Exchange warehouses. The key ingredient for steelmaking and electric car batteries slumped 45 per cent to $16,750 per tonne.
Copper has long had the nickname “Dr Copper” because its wide-ranging use in construction and manufacturing makes it a leading indicator of the health of the global economy.
However, supply issues and strong growth for green energy sectors such as renewable power, grid upgrades and electric cars — all of which are heavy users of copper because of its ability to conduct electricity — have called that into question.
In China, electric vehicles, plug-in hybrids and solar panels production surged roughly 35 per cent year on year in November, helping to prop up demand for copper despite the country’s struggling manufacturing and property sectors, according to the National Bureau of Statistics.
“The Chinese economy is not doing badly, although everyone seems to be talking about it as though it is in recession,” said Daniel Smith at AMT, a London-based metals broker.
Smith reckons that hidden stashes of copper, not declared in official inventories but available on the market, help explain why the rebound in prices has not been stronger. Copper has only gained 8 per cent since mid-October, despite the sweeping supply cuts announced.
Copper’s supply problems going into next year reflect broader concerns about the mining industry’s ability to keep up with a boom in demand as the world turns to green energy, even as the quality of deposits declines, making extraction harder.
That trend has been starkly on show at Chilean state-owned Codelco, the world’s number one copper producer, where output is set to be the lowest in a quarter of a century once again this year.
Goldman Sachs predicts a copper price of $10,000 per tonne in 12 months, helped by the supply forecast downgrades and the Fed’s dovish pivot last week.
“The supply cuts reinforce our view that the copper market is entering a period of much clearer tightening, underpinned also by a strong trend of metal pulled into China given its now fully destocked state,” analysts wrote in a note to clients.
Speculative activity has also helped drive copper’s rebound. Positions on copper across the three key exchanges have shifted from the widest net short — bets on lower prices — this year in late October to the largest net long in three months as futures traders bet on higher prices.
“Copper has separated itself from the rest of the base metal suite over the past month driven by a softening in macro headwinds and strengthening fundamentals, which in turn, have caught investors’ attention,” said Natalie Scott-Gray, senior metals analyst at StoneX, a broker.
Looking forward to 2024, analysts say that industrial metals are likely to remain in a tug of war between China’s economy and the rest of the world.
“The major determinant of price performance should come back to the extent to which ex-China growth, and hence demand, slows further,” wrote Macquarie analysts, “versus the extent to which China’s growth can re-accelerate”.
