Commodity analysts have been caught on the hop by a sudden rally in the copper market that has driven the price of the industrial metal to its highest level in almost three years.
Copper has jumped 20 per cent since the end of the May helped by positive economic data from China, the world’s biggest consumer of commodities, and a weak US dollar.
Investors have also piled into copper, a key source of earnings for major mining houses such as Glencore and BHP Billiton, betting that it could be one of the big beneficiaries from the growth of electric vehicles and advances in energy storage technology. In the past week hedge funds increased their net long position in Comex copper — the difference between bets on rising and falling prices — to a record 125,000 contacts.
Copper for delivery in three months on the London Metal Exchange is currently trading $6,903 a tonne. That puts it almost $1,000 above where analysts expect it to trade at the end of the year, according to consensus forecasts compiled by Bloomberg.
“We have seen a 20 per cent move up in the price of copper since the start of June but many analysts have not yet updated their forecasts,” said Matt Hasson of Numis Securities. “Mining equities have factored in a lot of the copper price rise but momentum in the sector could be maintained as target prices are set to increase as analysts play catch-up.”
Shares in Glencore and Freeport-McMoRan, the world’s biggest publicly listed copper producer, have both risen 30 per cent over the past three months.
While some analysts have started to nudge up their estimates, most believe the price has gone too far, too fast and that copper, used extensively in household wiring, will come under pressure. They say there are still plentiful supplies of copper and that the market has overreacted to China’s partial ban on scrap imports and a flurry of minor supply disruptions.
Some also think the US dollar, which has fallen almost 5 per cent against a basket of currencies since the end of May, could recover on the back of strong economic data. A higher US dollar makes commodities more expensive for buyers with other currencies.
On top of that, production at Escondida in Chile, the world’s biggest copper mine, is picking up and Glencore is set to bring its Katanga project in the Democratic Republic of Congo back online in 2018. In addition, Freeport has just reached an agreement with the government of Indonesia to keep operating its giant Grasberg mine.
There are also nagging worries about Chinese demand. “The property and infrastructure slowdown projected for China next year is expected to see Chinese growth ease from 3.3 per cent this year to 2.2 per cent next year, and a weakening China macro [data] will undoubtedly put downward pressure on copper prices,” said Macquarie analyst Vivienne Lloyd in a recent report.
In spite of those concerns, copper remains the industrial metal most favoured by analysts over the medium term, in part because of the electric car revolution but also due to lower quality grades and the absence of big copper projects in the pipelines of major mining companies.
Investment bank UBS reckons battery-powered vehicles will drive 1.2m tonnes per annum of incremental copper demand by 2025 — or 5 per cent of forecast consumption for that year — just as supplies start to peak.
“Our forecasts assume the current suite of visible mine supply and projects in development see copper supply peak in the early 2020s. After that time, we see grade decline drive a 1 to 2 per cent fall per annum in mine supply. We conclude many copper projects are likely to be needed to fill this gap,” wrote analysts at UBS in a recent report.