In the opening few weeks of 2023, LME Copper prices rallied from around $8300 per tonne to cross the $9000 per tonne threshold for the first time since June 2022. Since the last week of January, however, the red metal’s nascent bull run has stalled. The LME benchmark price has dropped below the $9000 mark again and, with several key factors influencing the market at present there is less certainty about where the price will go next.
Dollar Stops Sliding
One of the major reasons for many commodities falling in price in the second half of 2022 was the rally in the US Dollar on the back of multiple interest rate rises issued by the Federal Reserve. The strength of the dollar, which lessens demand for commodities priced in USD as the materials become more expensive for holders of other currencies, has subsided since November. That decline enabled an increase in demand for copper and supported the upwards price movement in January. Following the Fed’s most recent interest rate announcement of a further 25 basis points increase, the dollar has strengthened again and this has contributed to the recent dip in copper prices.
While the most recent interest rate increase was largely expected by market participants, it was accompanied by stronger than expected employment information which has changed the public perception of how long interest rates will remain elevated. The latest US unemployment rate was 3.4%, down from 3.5% in December, which is the lowest level in almost 54 years. Furthermore, nonfarm payrolls rose by 517,000 in January. This was almost double December’s figure and significantly more than Reuters’ expectation of 185,000 jobs. The tightness in the labour market is not a phenomenon that is unique to the United States, however it does increase the likelihood that interest rates will remain high for an extended period and may even be increased further. Indeed, according to Fed Chairman Jerome Powell, it will “not be appropriate to cut rates this year” based on the Fed’s economic forecasts. High interest rates increase the ‘cost of carry’ for manufacturers, which refers to the costs incurred by storing raw material inventories, and therefore weaken demand and pricing for commodities.
Decisive Demand Variables
While interest rate increases may dampen demand for copper, the full economic revival of China will boost copper prices. As the Zero-Covid policy was abandoned at the end of last year there was popular anticipation of a China-fuelled rally across commodity markets, particularly those related to construction and property. A rapid recovery has not yet materialised, particularly for the nation's debt-laden property sector, but markets are likely to be supported by Chinese recovery this year; a recent report from the IMF predicted that China’s economy will grow by 5.2% this year, compared to 3% in 2022. While it hasn’t yet sprung into life, the questions regarding renewed Chinese demand for copper are more focused on the issue of ‘when’, not ‘if’, there will be upward pressure on prices.
Another major demand factor that could influence copper prices this year is electrification. Electric vehicle sales have skyrocketed in recent years and as demand for these cars continues to grow, the amount of copper required is outpacing the global supply. As reported by CNBC, many market experts are forecasting copper supply deficits due to the pace of popular transition to EVs. A particular challenge, and demand driver for copper, is building the necessary infrastructure to charge EVs, rather than manufacturing the vehicles themselves. Without significant investment in copper mining and processing facilities in the short-term, a supply shortage for the metal is likely over the next decade which will further boost prices.
South American Supply
While increased demand from the EV revolution challenges the supply-demand balance for copper, there is further danger of copper shortages stemming from key producing nations Peru and Chile. Peru has been rocked by civil unrest since early December when President Pedro Castillo was ejected from the government following his impeachment. In the ensuing period of protests, mining facilities have fallen into the crosshairs for Castillo’s supporters. Glencore had to suspend activity at its Antapaccay for almost two weeks following an attack by protesters, while MMG announced plans to halt operations at the Las Bambas mine due to blockades on the transport routes to the mine which is responsible for around 2% of global copper production. While protests continue to threaten the steady copper supply from Peru, which accounts for around 10% of global copper production as a nation, there will continue to be upward pressure on prices.
While civil unrest is not causing the same issues in Chile, a country which accounts for over 25% of the global supply and is the leading producer in the world, copper production is nonetheless forecast to grow at a slower rate over the next decade, rather than accelerate in line with demand. This projection, reported by Reuters, was made by state-owned mining company Cochilco earlier this year. At a time when copper demand is expected to increase year-on-year, this projection indicates that higher prices will arrive in due course.
ChAI’s Monthly Average Price Forecast, 9/2/23
ChAI’s Forecast
ChAI’s LME Copper price forecast, as shown in the image above, is moderately bullish on the 1 and 3 month time horizons, with a decline in 6 months before rising again towards the end of the year. Tight inventories and the shape of the LME futures curve are the main drivers for ChAI’s bullish sentiment on a 1 month horizon, as well as the weakening of the Chilean Peso.
Beyond being a vital material for manufacturing sectors, copper is also viewed as a barometer for the health of the wider economy, and consequently if often referred to as ‘Dr. Copper’. Given the variable factors such as the Fed’s interest rate policy, demand from China and general electrification and supply risks in key producing nations, copper looks set to be an important market to watch this year.
