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Copper price down but far from out

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The manic activity in copper seen last month seems to have calmed down a notch with London Metal Exchange 3-month copper prices settling not far of $9,400 a tonne.

The October boom and bust started with some genuine supply issues as operations at four mines in Peru were disrupted due to road blockages by local communities. But the spike to over $10,450/t was further “helped” by trading houses draining the metal.

Stocks in LME warehouses dropped almost by half in October to 130,000 tonnes, the lowest level since 1998 – according to Bloomberg, because of activity by Swiss-based trader Trafigura. The squeeze in warehouse stocks and the sudden widening between the spot price and the three-month futures prompted the usually conservative LME to step in and change rules to alleviate pressure on short position holders.

Forecasters at Societe General Cross Asset Research had forecast that copper would come down slightly in the third quarter of this year to $9,500 a tonne (following almost nine months of post-Covid increases) but the price in fact dropped another $100/t. They argue that copper could decline even further over the coming two quarters, possibly to as low as $7,500/t as Covid continues to do damage to global demand.

A contributing factor is the slowdown in the Chinese construction sector, the largest end user of copper. At the same time, one of the biggest new copper mines in decades is about to start production in Congo and will ensure that the market will be awash with new supply next year.

“While there may be some near-term headwinds for copper from slowing economic growth in China, the medium-term outlook for the is metal very strong,” said Nitesh Shah, a commodity strategist with ETF manager WisdomTree. “The combination of renewed interest in infrastructure spending and an energy transition bode very well for the metal. The United States has just signed into law a US$1.2 trillion infrastructure bill, with spending earmarked for a whole host of copper-intensive infrastructure projects including the buildout of electric vehicle charging infrastructure (US$7.5bn), power infrastructure (US$73bn), roads and bridges (US$109bn).”

Shah says that an energy transition – motivated by climate change – to move progressively to renewable forms of energy, augmented by storage solutions like batteries, will be very positive for copper.

“Transmission and distribution cabling needed for greater electrification of our energy systems will be very copper demand positive,” he told The Armchair Trader this week. “Electric cars, which on average use close to four times as much copper as internal combustion engine vehicles, will also be another strong source of demand for the metal. These secular trends are taking place at the time when copper ore grades are declining and the strength of capital expenditure from traditionally large copper producing regions like Chile and Peru are under question.”

The month ahead for copper prices

Going into December, some asset managers are likely to start reducing copper holdings as part of their year-end risk reduction strategy. This will be partially balanced out by recent positive US economic data which promise stronger demand in the months ahead. Both US jobs data and factory data showed an uptick in September and October, the former significantly exceeding expectations.

In the longer term, “both supply and demand outlook for copper are extremely bullish,” says Societe Generale research.

Miners are facing lower grades which will dramatically increase copper extraction costs, and capital expenditure in new projects is far from enough to mitigate coming depletion.

On the demand side, consumption from renewables, electric vehicles and electrical grid updates will become the main drivers and trigger fast-paced copper demand growth. Societe Generale expects copper prices to average $12,500/t by 2025. “This is far beyond our one-year-out forecast, but we expect the market to be forward-looking and prices to start rebounding to $8,500 by the end of next year.”

You can choose from a range of Copper ETFs

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Copper
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXQ89 COPA USD
WisdomTree Copper – EUR Daily Hedged
EQi
JE00B4PDKD43 ECOP EUR
WisdomTree Copper 1x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B24DK645 SCOP USD
WisdomTree Copper 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B2NFTF36 LCOP USD
WisdomTree Copper 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
IE00B8JVMZ80 3HCL USD
WisdomTree Copper 3x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
IE00B8JVMZ80 3HCS USD

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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