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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 industrial metal suggest prices may climb even higher.
For the month, prices for most-active copper futures
HGU21,
HG00,
look to score a nearly 3% gain, their third in four months — erasing some of the 8.3% decline suffered in June.
“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,” said Matthew Fine, portfolio manager of the Third Avenue Value Strategy portfolios. He sees the recent rise in copper prices as a “simple reversal of the decline in June.”
China said in June that it planned to release national reserves of major metals, with a goal to stem the rally in commodity prices brought on by a global economic recovery. The news helped pull copper prices down from the record highs reached the month before. In early July, Beijing auctioned state stockpiles of copper, aluminum and zinc reserves to raise supplies, according to The Wall Street Journal.
With “speculative positioning now more normalized,” however, Fine said the “realization that Chinese reserve releases are not likely to be very large and are temporary in nature, the fundamentals of a tight physical market and a terrific demand outlook are being weighted more heavily.”
Copper prices trade around 28% higher year to date, which would mark the largest yearly rise since 2017. After the September contract settled at Thursday at $4.52 a pound, it’s down 5% from the record settlement high of $4.762 a pound on May 11.
Also see: Where gold stands a year after hitting a record-high price
“Lack of supply, increased demand and excessively loose monetary policy could likely propel copper prices back to, or even above recent highs,” said Mike McDaniel, chief investment officer of risk assessment tool Riskalyze.
He urged caution for traders, however, citing high risk in the copper market. On Riskalyze’s Risk Number scale of 1 to 99, he pegged copper at 97, “meaning it has meaningfully more risk (and potential return) than the general U.S. stock market,” which is at 74 on that risk scale.
“While copper has proven once again that it can surge higher, it is normal to see losses in excess of 40% over a 6-month period,” said McDaniel.
For now, however, demand for copper is on the rise.
“Typically strong copper consumption growth is being accelerated further by many simultaneous clean energy initiatives,” Fine said.
The International Copper Study Group (ICSG) reported that preliminary data show 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.
“Economies around the world are recovering at varying speeds but, in general, quite quickly,” says Fine. Spending on infrastructure, such as electricity distribution and transportation networks, household appliances and automobiles has “held up very well and comprises several of the largest sources of copper demand.”
Consumption growth also comes at a time when a “decade of under-investment in copper mining is likely to cause a global decline in production and there is almost nothing that can be done about the supply picture” near term, said Fine.
The ICSG said world copper mine production edged up by 4% in the first four months of this year, but also noted that government-imposed restrictions related to COVID-19 “continue to constrain output in a few countries this year,” including Chile.
Fine admitted that in the near term, he can’t forecast where copper prices are headed, but believes prices “have the potential to go far higher than levels we have seen recently,” given the growth in demand for the metal and limited potential for a large supply response to that demand.
