Copper Recent Price Hike is Anything but a Temporary Development, which Means Further Upsides are Here to Stay

Copper prices have been steadily growing lately – to the extent when any coincidental and/or cyclical factors are no longer viewed as essential. The most cited reasons are the floods in China and looming Chilean Escondida workers strike. They raise legitimate supply concerns while demand rises and inventories are falling. A weaker dollar may also contribute to rising prices. Copper has had an impressive run so far this year and after a recent pullback from its record highs, tight supplies and rising demand for the most widely used non-ferrous metal suggest prices may climb even higher offering excellent opportunities amid mostly disruptive and volatile trends elsewhere. Various public media headlines like “Copper is ‘the new oil’ and low inventories could push it to $20,000 per ton” etc. – have been only adding intrigue.

So far copper is trading around 30% higher year to date, which would mark the largest annual increase since 2017. After the September Nymex contract settled on Thursday at $4.52 a pound, it’s down 5% from the record settlement high of $4.762 a pound on May 11. On Friday September copper (HG1:COM) was +4% to $4.574/lb, while London copper looks on track for a fifth straight session of gains after touching its highest mark since June 16 at $9,665/ton.

Copper producers enjoy strong gains: FCX +3.9%, SCCO +2.9%, HBM +4.3%, TECK +4.5%.

ETFs to consider: COPX, CPER, JJCTF, JJC.

As we mentioned above, floods in central China, especially in the Zhengzhou industrial and transport hub city, are raising supply concerns and demand for rebuilding damaged infrastructure. The announcements that the Chinese government would release strategic reserves in an effort to temper prices worked to some extent throughout June and was exacerbated by unwinding of speculative positions that had been built up over the past year.

China said in June that it planned to release national reserves of major metals, with a goal to temper the price rally in various commodity prices brought on by a global economic recovery. The news helped somewhat ease copper prices from the record highs reached the month before, but proved far from curbing the underlying rally. In July, Beijing auctioned state stockpiles of copper, aluminum and zinc reserves to raise supplies.

Also, a months-long wage negotiation at the world’s biggest copper mine is heading into a tense finale over the coming days. The main union at Chile’s Escondida is calling on workers to be ready to strike amid limited progress in mediated talks. But owner BHP Group (BHP. LN) said it had made substantial improvements and vowed to continue its practice “of not sweetening offers during strikes”.

The International Copper Study Group (ICSG) said in its latest monthly update that the global refined copper market deficit widened to 75K metric tons back in April. It also reported that preliminary data showed “apparent world refined copper usage” rose by 4.5% in the first four months of this year, with China’s apparent usage up by around 9%.

Refined copper usage began to recover in the second half of 2020, but remains below pre-pandemic levels in most countries, according to the ICSG. In our view, this fact offers some idea about the potential collectable upsides. Consumption growth also comes at a time when a decade of underinvestment in copper mining is likely to result in a global decline in production and there is almost nothing that can be done about the supply picture near term.