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Don’t get wrong-footed by the drop in the copper price

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Copper futures dropped to the lowest level in two months this week to trade just under $7,690 a tonne on the LME and at $3.40 per pound on NYMEX.

Fears of a global recession, the long-term impact of China’s Covid lockdowns, rising interest rates and aggressive central bank policies in both Europe and the US have dampened not only the current prices but also the outlook for the rest of this year.

True, the current set of global economic circumstances offer slim chances of a quick recovery. The reading for China’s latest Manufacturing Purchasing Managers Index indicated the first contraction since May, falling below the benchmark 50 level to 49.5 in August. Employment fell for the fifth month running.

For copper this has meant that producers have been battening down the hatches, not only cutting back on current production but also holding back on investing in future projects. Most recent plans include mining giant Newmont Corp. putting on hold a $2 billion project in Peru and Freeport-McMoRan saying that current prices are too low to support new investments.

There are a few notable exceptions.

Udokan Copper, the developer of a large copper deposit in Siberia with planned production of 135,000 tonnes per year, said this week it will start exporting copper to China in 2023. Also, the vast Oyu Tolgoi complex in Mongolia is expanding towards a production of 500,000 tonnes of copper a year. And yet earlier this year S&P Global argued that global copper production would need to double by 2035 to meet demand that will be generated from existing copper users and the ongoing green energy transition.

Demand to intensify over the course of the decade

For instance, in its long-term strategy to achieve net-zero the US has stated that it aims to decarbonise energy by 2035 and that it wants to achieve 50% of light-duty electric vehicles sales by 2030 – all of which will require vast amounts of copper.

Even without the green transition, expected future demand will continue to grow as accelerated population growth will keep creating requirements for copper, even if global economic growth continues to slow.

According to S&P Global worldwide copper demand is forecast to grow from 25 million metric tonnes in 2021 to 50 MMt by 2035, a record-high level that will continue to rise to 53 MMt by 2050. Copper supply shortfalls are predicted to begin in 2025 and persist through most of the following decade. “The worldwide copper supply gap could reach an unprecedented 9.9 MMt by 2035,” S&P Global said.

Time to fine-tune the trading strategy

A good trading strategy here would include making use of the LME’s further out copper futures, including December 2023, December 2024 and December 2025.

While there is scope for the nearby contracts cash and three-months copper to continue to weaken it might be time to look at the further out contracts which are currently not pricing in the expected future shortages. December 2024 copper is trading at $7,710/t, at a $25/t discount to current three-months’ price, while December 2025 is trading at $7,715/t.

Given the demand forecasts, these prices may end up looking very conservative over the next two years.

Copper ETFs from WisdomTree

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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