Copper has been the bellwether, go-to commodity as the world transitions to clean energy and electric vehicles. Yet with all the copper demand figures floating around and the lack of supply alternatives, it's a wonder that the price of copper has remained muted this year, trading close to $8,500 a ton, which is almost flat for the year and 20% below its all-time high of $10,800 a ton in March 2022. So what plagues this metal?
According to a recent JPM report, refined copper demand is set to grow by a compound annual growth rate of 2.5% over the next decade. That's about 32 million metric tons by 2033, which is about 7 million metric tons higher than its forecasts for 2023.
But looking at the pipeline of new supply and projects, there is little new copper to be discovered. With that sort of gap, one would expect copper would be trading much higher as the incentive price to produce copper is above $8,500 per ton. The head of base metals research at CRU Group suggests producers need to invest at least $105 billion to build to 65 million tons of new mine capacity by 2032.
But there is a reason why copper is referred to as Dr. Copper, as it is also sensitive to the global economic cycle, especially the Chinese economic cycle. There have been optimistic estimates for China's demand trajectory following its reopening this year, but imports have failed to surprise to the upside.
China imported 408,174 tons of copper in March, down by 19% year over year and the lowest monthly intake since October. First-quarter imports of 1.3 million tons were 13% off last year's pace.
China also has changed the way it grows. It is no longer basing its growth off the industrial growth of the past decade as is more consumer-focused. For example, registered stocks of copper are low on the Shanghai Futures Exchange, slumping from 89,000 tons at the end of September to 16,000 tons at the close of December. But this is just the visible inventory that we can track; there are a lot of hidden stocks that make it hard to see what really is going on behind the scenes in terms of inventory cushion.
As is the case for any commodity, it is relatively easy to plot the supply side as projects are known well in advance, but demand is the parameter that is key in predicting the price trend. We all know analysts are used to penciling in very high forecasts based on their secular bias, but copper is sensitive to global economic cycles and we are entering, or already have entered, a recession to which China is not immune.
Time will tell who wins, but for now the market is divided on whether a recession hits first or the U.S. central bank cuts rates. The two outcomes have two very different price paths for copper. Choose wisely.
