Commodities, Copper, Features

Bulls and bears slug it out over direction of copper

copper

Words by Tony Featherstone.

Copper’s increasing use in renewable-energies arena ensures a bright long-term future.

“Dr Copper” is providing a tricky diagnosis for investors. Copper bears argue the metal has run too far, too fast. The bulls, however, say copper is in a multi-year price uptrend.

Since 2020, the bulls have been in charge. The LME copper price soared from $US4863 ($6620) a tonne in March 2020 at the peak of the global equities crash, to above $US10,000 in May 2021. The three-month copper contract traded near $US9300 a tonne in early September 2021.

Copper’s ability to predict major turning points in the global economy again came to the fore during the pandemic (hence the joking reference that Dr Copper has a PhD in economics!).

US investment bank Goldman Sachs this year predicted copper would hit $US15,000 a tonne by 2025, buoyed by demand from renewable-energy providers.

Other forecasters are more sanguine. The World Bank estimates the spot price for copper will decrease to $US7500 in 2022, before rising to $US8250 by 2030. The International Monetary Fund tips an average price of $US8313 in 2021, followed by a gradual decline over five years.

The Australian Government tips an average copper price of $US7980 in 2023, in its Resources and Energy Quarterly June 2021. Copper exports are forecast to reach $13 billion in financial year 2022 (FY22), from $10 billion in FY20, thanks to rising copper production and the booming copper price.

The divergence between government and market forecasters on copper’s outlook reinforces the tussle between copper bears and bulls. Goldmans is among the most bullish forecasters on copper, but plenty of private firms have higher copper forecasts than government bodies.

So, who is right? The answer partly depends on one’s investment horizon. There are short-term fears that China might release more copper stockpiles to clamp down on rising commodity prices and the prospect of higher inflation.

In June, the World Bank said the global economy is set for its fastest recovery in more than 80 years, after a savage recession last year. But global economic forecasts depend greatly on COVID being contained and lockdowns easing. All bets would be off if a virus mutation emerged that is resistant to current vaccines or made them less effective.

Moreover, a slower-than-expected recovery in the global economy in 2022 would puncture copper’s rally and weigh on other commodity prices. Copper’s rally over 12 months might have already factored in anticipated global economic recovery in 2022, and then some – leaving little room for disappointment in the current price.

Technical analysts are also sweating on copper’s price action. After breaking through previous resistance around $US8000 on its chart, copper stormed above US$10,000 but has since retreated. They will watch if copper retests previous price support near $US8000 in the next 12 months, bringing the metal closer to government forecasts.

The bears have a reasonable case that copper will give up more of its rally this year. No commodity price goes up in a straight line forever. A price pullback or consolidation period could be healthy, given the extent of the metal’s gains this year.

Bull case

Three factors suggest copper gains go higher again, after its price gets through that pullback or consolidation process. The first is the global economy. The world could have a rare period next year of rising global economic growth and low inflation.

Market fears of higher inflation climbed earlier this year after worrisome US inflation readings. Inflation hawks said COVID was creating supply-chain and labour-market bottlenecks that would drive prices up. Higher interest rates would be needed to cool inflation.

Inflation doves said higher prices were transitory – a temporary effect of the pandemic that would unwind as the global economy adapted. So far, the doves are right. Certainly, central banks worldwide seem in little hurry to lift interest rates to stem future inflation.

The medium-term (one to three years) outlook for copper – based on supply limitations – is the metal’s strongest argument. Copper bulls often point to rising copper demand from renewable energy and other industries. But the real story is constrained new supply in copper.

Low copper prices for much of the previous decade made it uneconomical for many producers to bring on new copper supply. Uncertainty over the sustainability of China’s high economic growth and its commodity demand was another headwind for copper supply.

Lately, the pandemic has created logistical constraints for miners to develop new copper supply, or open current projects to schedule, particularly in developing nations hit hard by COVID. Sourcing labour, equipment and regulatory approval has been harder during the pandemic.

Nobody doubts copper has strong prospects in a world hurtling towards renewable energies. But the metal has become harder to find and mine. Copper projects are taking longer to be completed. Producers can’t just flick a switch and bring on new supply, despite the higher copper price.

Labour-market issues and sovereign risks are other considerations. Last year, thousands of workers at China Molybdenum’s Tenke Fungurume Mining copper and cobalt mine in the Democratic Republic of Congo successfully went on strike for more pay.

In August 2021, workers at two of Chile’s largest copper mines went on strike over pay disputes. Against that, management at Chile’s Escondido copper mine – the world’s largest – approved a new pay deal for workers, averting a strike.

In Peru, a strike by transport workers caused shipment delays to copper concentrates. As often happens during commodity booms, workers in developing nations took industrial action to get more pay. Chile and Peru account for about 40 per cent of global copper production. Peru had an election this year and Chile’s is in November, creating more uncertainty.

Governments, too, want a higher slice of mining profits. Chile’s Copper Royalty bill cleared another approval hurdle in September. If passed in the lower house of Chile’s parliament, the bill (in its current form) would create the heaviest tax burden among major copper nations.

Taken together, strikes, higher government royalties and delays in bringing on new copper supply could create supply constraints that take years to unwind. And offset weaker copper demand from China, if that occurs, over the next few years.

Long-term fundamentals

Copper has an excellent long-term (three to five years) story as investment in renewable energy soars. Total confirmed investment in renewable assets was $US1.85 trillion ($2.39 trillion) globally in February 2021, noted Credit Suisse. This could hurtle towards $US4 trillion if US President Joe Biden’s proposed Green New Deal stimulus package is approved.

As governments and industry (in more countries) move to decarbonise their economy by 2050, demand for copper should rise, given its use in renewables. Copper is used in electric vehicles (EVs), battery storage, wind turbines, solar panels and other green technologies.

Metals forecaster CRU says COVID is accelerating the transition towards copper-intensive sustainable energy sources and solutions. It says cathode demand from EVs and renewables should grow by more 15 per cent and exceed one million tonnes for the first time in 2021. But even that is only around five per cent of the total market.

On balance, copper might have a challenging 12 months (compared to its previous price high) as the market digests its recent gains. But the metal’s medium- and long-term outlooks are bright amid supply constraints and rising copper demand in renewables.

Prospective investors could consider using any short-term weakness in the copper price (if it continues) to increase their portfolio exposure to ASX-listed copper producers like OZ Minerals, Sandfire Resources, Aeris Resources, Hot Chili and Cyprium Metals.

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