By Dr. Kwasi Ampofo, Head of Metals and Mining, BloombergNEF
Demand for copper is set to continue rising and is anticipated to exceed primary supply within the next four years. The mismatch in supply and demand is likely to result in copper prices surging 20% by 2027, according to BloombergNEF analysis.
The primary supply of copper is set to fall short of demand between 2023 and 2027, with secondary production increasingly supporting supply with as much as 5.4 million metric tons by 2027. In 2024, the primary supply deficit is projected to be 3.6 million tons, which is less than the past 10-year average of 3.9 million tons. Based on these factors, copper prices are more likely respond to economic sentiment than the long-term supply and demand balance.
After 2025, the supply deficit is forecast to peak at 4.5 million tons, and pricing should then begin to reflect the tighter market compared with previous years. This will incentivize production from recycling sources to meet growing demand. In addition, the global economy will likely overcome recession concerns, which will lead to a stabilization of interest rates. The deficit level in 2025 will be similar to the 4.6 million tons seen in 2021, when the average copper price was $9,700 per ton.
Uncertainty has surrounded copper demand this year and has had a significant impact on prices. Copper has experienced price volatility in 2023, driven by China’s slow economic recovery and the dim economic outlook in the US. The average year-to-date London Metal Exchange copper price is $8,659 per ton, with a high of $9,356 in January and hitting lows of $7,902 in late May. Further, economic indicators in South Korea and Japan have echoed the same weakness observed in China and purchasing managers’ index readings across major Asian manufacturing hubs have seen continued monthly declines.
China is responsible for over 50% of the world’s copper demand, according to BNEF. An economic slowdown in the country could put significant downward pressure on prices. On the other hand, while the lower US inflation rate of 3.2% in July 2023 compared with the peak of 8.5% a year earlier could be a sign of softening prices, it could also increase expectations that the interest-rate tightening cycle will ease, which could in turn boost copper prices over the next two years.
After hitting an all-time record high of $10,730 per metric ton in early March on the London Metal Exchange (LME), prices have dropped 21% to stand at $8,450 per metric ton in late June, a level $300 below where they were projected to be even by 2024. The equally sharp drop in open interest on both the LME and Shanghai Futures Exchange (SHFE) during this correction highlights a general flight from the market that imparts continuing downward momentum to prices into July.
Given the rapid change in the market and the bearish sentiment now prevailing, the question becomes how low could prices go; at what point does it become attractive to move back into the market? Looking at recent cyclical lows, or more fundamentally, calculating the average cash costs for the top (i.e., most expensive) quartile of operating mines yields the same answer: an absolute bottom in this market looks to be near $5,000 per metric ton.
We do not think prices will realize anything near another $3,000 per metric ton correction for two reasons. First, the principal cause of the correction—slowing consumption growth, and in particular, declining mainland Chinese consumption—will not persist even to late 2022. A recovery in Chinese consumption later this year will, by itself, lend prices some support.
Second, inventory remains low and has shown no sign of increasing during the past two months. When translated into weeks of consumption, April’s reading of 2.7 is well below an equilibrium level of 3.8 weeks; i.e., the market is reading fundamentally tight. We do expect the market to shift into surplus over the next year. However, the projected size of the surplus is modest and points to an equally modest inventory build, meaning the market is expected to still read fundamentally tight at the end of next year.
This does not mean that prices cannot fall further, but these factors would seem to limit the market’s downside.
Listen to John Anton, Director, Pricing & Purchasing, talk about changing metals pricing
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