The copper price should get a boost again

After a brief rally at the start of the year, the price of the industrial metal copper has bounced back. However, according to experts, it could clearly rise again by the end of the year. And in the longer term, the trend towards electric vehicles could push the price into new atmospheres anyway.

At the start of the first corona wave in 2020, the copper price fell to a low of $ 4617 per ton. By early 2021, however, it had recovered to over $8,000. It has since peaked at $10,730, ranging from $8,500 to about $9,400 since early 2023. A ton of industrial metal currently costs $8,870 (as of Thursday afternoon).

Copper as a leading indicator

Copper, also like «Dr. Copper”, is often regarded as a leading indicator of economic development. Because it is used in many sectors such as electrical industry, construction industry or for computer printed circuit boards. If demand is good here, the global economy is doing well.

However, its reputation as “boost metal” has now also been criticized by certain pundits. On the one hand, they mention the sometimes waning importance of “Dr. Copper» for industry. On the other hand, they point out that industry is making an increasingly smaller contribution to the overall performance of the economy compared to the services sector.

Valentino Guggia, economist at Migros Bank, confirmed in an interview with AWP news agency that its reputation as an economic metal has suffered again in recent months. The copper price rose rapidly and sharply in November despite the tense economic climate. The trend continued in January. Since then there has been a slight decrease, but it is still recorded at a high level.

This unusual development can be traced back to three main reasons: First, mining activities have now reduced as a result of the pandemic. Secondly, the extraction and processing of the copper often do not take place in the same place. Accordingly, supply chain disruptions and higher fuel prices would have fueled copper prices.

Production stoppages in Latin America

And finally, on the supply side, there are again disruptions in production in South America, which are driving up prices. Migros Bank economist Guggia cites production cuts as a result of heavy protests in Peru. Commerzbank analyst Thu Lan Nguyen adds that there are also problems in Chile. Production in February in the world’s most producing country fell to its lowest level since 2017.

Nguyen emphasizes that production weakness there is based on declining ore grades, water shortages and operational problems. The Chilean copper commission nevertheless expects production in 2023 to increase by about 6 percent compared to the previous year, which should be mainly driven by a recovery in the country’s two largest mines. But many experts paint a more pessimistic picture.

The situation may also remain difficult on the supply side in the longer term, adds UBS man Dominic Schnider. The copper experts have been talking about an imminent increase in supply for years. This has not yet been realized. There are always strikes or technical problems, especially in South America.

And the situation will not improve in the longer term, as new deposits of the metal often have to be developed in difficult geographic locations. “In addition to the sometimes high altitudes, there is a lack of water, which makes production difficult,” explains Schnider.

Upside potential in the longer term

If you combine supply and demand factors, there is still upside potential for commodities such as copper, writes Ole Hansen of Denmark’s Saxo Bank. The main reason for this in the long term is the energy transition, for example in the automotive sector. “Electric vehicles, for example, contain much more copper than combustion engines,” explains UBS expert Dominic Schnider.

In the short term, however, the current upswing in China has a positive effect on demand. Schnider explains that about 55 percent of copper demand comes from the “Middle Kingdom.” And the Chinese would start traveling again after their long corona lockdown, they were consuming again, so the economy was about to get a boost. Conversely, signs in the US point to an economic downturn, but only about 7.5 percent of global copper demand comes from there.

As a result, UBS is “bullish” on the prospects for the copper price. According to Schnider, the price of copper per ton could rise again to $10,000 in the coming months and even break through this barrier by the end of the year. In any case, Migros Bank also talks about a “soft tailwind” for the copper price in the near future.

There are hardly any warehouses for copper in Europe

A problem with copper would probably put the West at a disadvantage against the “Middle Kingdom”. Because if demand for the raw material were to increase sharply in the short term, Europeans and Americans would have no choice but to get the metal onto the world market at a very expensive price, Schnider explains to AWP. “With the supply chain issues just being resolved and the risk of geopolitical turmoil looming, Europeans should ask themselves whether they want to hold larger strategic stocks of their own,” he says.

The West is “vulnerable”. There is a lack of attention to resource security in politics and strategic foresight is required to some extent. As is known, this is already established in other economic sectors such as the production of medicines or semiconductors in industry. (oee/sda/awp)