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South American copper production problems keep price at close to ATH


Copper futures remain close to their all-time highs as production issues in Chile and Peru, the top two global producing regions, balance out some of the slowdown in demand in China.

Not only is the dip in prices seen during Covid a thing of the distant past but copper is now trading on average between 50%-60% higher than it did before the outbreak of the pandemic. LME three-month copper is trading at $10,276 a tonne, down from a record high of $10,729/t in early March and up from $9,600/t at the start of the year.

The conflict in Ukraine, which now seems to be entering a second phase with renewed fighting in the east of the country, is also keeping prices propped up as the disruption to the oil and gas market and the partial breakdown in trade relationships between Russia and other countries contribute to the cost of production and the transport of metals.

China property slowdown caps copper

For the moment, prices are likely to remain capped by the general slowing down of China’s economy, and in particular the country’s infrastructure and property construction. China plays a disproportionate role in the copper market as it accounts for 54% of the global consumption – and that number is rising by the year.

The second outbreak of Covid, the country’s zero-Covid strategy and the particular role of Shanghai, its sprawling finance and manufacturing hub, is eroding the outlook for China’s economic growth this year. However, there are glimpses of light. After four weeks of a severe lockdown, Shanghai plans to allow a number of manufacturers to restart operations with workers in strictly enforced bubbles. Supply chain disruptions caused by the Shanghai lockdown threatened major industries like car makers and the slight easing of restrictions will start breathing back life into those chains.

However, the Chinese property market will still have some way to go. A property market squeeze which started with the financial difficulties at Evergrande Group caused the first wave of defaults by developers and the industry has not recovered since then. With home sales still declining and the cost of borrowing on the rise the property market will likely continue to struggle for some time to come.

Supply issues persist for copper

Given the drop in Chinese demand, copper prices should, in theory, be much lower but this is being balanced out by production issues.

Chile, the world’s largest producer of copper, started producing lower than expected volumes of copper this year and the unplanned decline sparked some panic buying in the market. In January the country’s output dropped 7.5% year-on-year to the lowest level in 11 years because of lower ore quality and insufficient water supply, according to the state Chilean Copper Commission Cochilco.

Although there are some temporary factors affecting Chilean production – like water issues – several analysts expect the country to settle into lower levels of production as new major developments are lacking and existing mines become old and less efficient. The country will not be able to rectify this without major investments that would take years to come to fruition. The world’s second-largest producer Peru is planning an increase in taxes on mining companies which will also add to the cost of copper.

While Chinese demand, and particularly property demand, has slowed down, other industries around the globe are consuming more copper – particularly for electric cars and renewable energy. With all this in place the copper market could move into a more serious deficit over the next few years. Goldman Sachs is one of the most bullish forecasters for copper, expecting a major supply deficit in the next three years and an increase in prices to $13,000/t over that period.

Copper ETFs from WisdomTree

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Copper
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
WisdomTree Copper – EUR Daily Hedged
WisdomTree Copper 1x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
WisdomTree Copper 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
WisdomTree Copper 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
WisdomTree Copper 3x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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