Copper not gone to pot

Those with a vested interest in copper might be finding the present US–China trade war a particularly-bitter pill to swallow at the moment. According to Matthew Badiali — senior analyst at financial services business Banyan Hill Publishing — before the escalation of the conflict, copper was in a steady two-year bull market.

However, earlier this month, the price of the material hit its lowest in over two years, reportedly reflecting concerns from investors about the volatile trade dispute and muted economic growth. On 5 August, copper futures HGU19, -0.50% settled at $2.544 a pound — a figure which, under data from financial data and software organisation FactSet, was the lowest for a ‘most-active’ contract since June 2017. In June last year, copper prices had slipped under $3 a pound as US and Chinese threats to implement reciprocal import tariffs intensified, and since then, the metal has failed to trade above this level.

Not all bad

But regardless of tighter copper supplies, analysts believe that commodities traders could overcome economic fears, which would increase copper values. Brent Cook, economic geologist and co-editor of the newsletter Exploration Insights, which provides junior mining and exploration industry analysis, says that accurately reflecting a slowing world economy is the metal’s current price.

In fact, Goldman Sachs, the investment bank and financial services firm, is bullish on the metal. Speaking on the programme Bloomberg Daybreak: Americas in August, Jeffrey Currie, the firm’s global head of Commodities Research in the Global Investment Research division, saw an export recession taking place, with large exporters being hit across the globe. However, he was in a different mind about imports.

“Importers, on the other hand, are drawing down their inventories,” he said. “They’re destocking, which brings us to copper. So, as you begin to destock, a lot of these in-use types of goods — because you’re waiting for a trade war to be resolved — you’re going to have to go back and replenish these inventories, which should give you a pop.

“Fundamentally, we like copper. Our target is $7,000 a tonne. We’re trading 5,700, 5,800, right now because the fundamental picture [for] supply [is] supplies have tightened up significantly, but the demand picture, again, [is] middling: not great, not bad. In China, you still have the property market, you still have the infrastructure in grid markets — … exporter-driven weakness. The rest of the picture, I would say, doesn’t warrant this type of pullback.”

Speaking in August on IG TV, the broadcast channel of online trading and investments provider IG, John Meyer, partner and mining analyst at investment banking firm SP Angel, put the futures low down to a number of factors. A lot of it, he said, is driven by speculators deciding to “go short” instead of having positive bets on copper. However, the analyst “[suspects] there’s a bit of manipulation from the Chinese authorities because they like commodity prices to be lower”. Another element is currency: Mr Meyer says that the Chinese central bank has let the renminbi, China’s official currency, drop — or maybe even encouraged it to do so — and Chinese copper buyers will want to pay slightly less for it. As for the US dollar, it currently looks stronger in comparison to the renminbi, and when the dollar rises, the prices of metals tend to pull back a little. While the US economy is doing “proportionately better” in terms of growth, even American policymakers are concerned about it, hence a then-recent quarter-point rate-cut.

“So, [there are] lots of policy issues going on, lots of people concerned about the growth rate of the global economy, and therefore commodities [are] pulling back a bit,” Mr Meyer concluded.

“Copper follows the global economy, and when the global economy is slowing down, the copper price tends to fall as well,” he added.

An electric future

There’s a big plus point for copper going forward — and it’s all centred around electric vehicles (EVs). In May, the International Energy Agency said that electric mobility is expanding fast: last year, the world’s electric car fleet topped 5.1m, up 2m from 2017 and nearly doubling the amount of new electric car sales. According to Henry Salisbury, analyst for copper demand at research and consultancy group Wood Mackenzie, copper constitutes “a cornerstone of the EV revolution”. With EVs themselves, there are no viable alternatives to copper, he explains.

“At the heart of the EV, copper is used throughout because of its high electrical conductivity, durability and malleability,” the analyst said, adding that “even more is used in charging stations and in supporting electrical grid infrastructure”.

Stan Bharti, chief executive of private merchant bank Forbes & Manhattan, argued that with a rise in the global population and climate change, base metal demand will go up due to the environmentally-friendly nature of EVs. As for Mr Badiali, he thinks that the true driver of copper is set to be the pace of adoption of EVs and alternative energy and that “if the trend is real, then we are watching the birth of an epic bull market” for the metal. According to him, copper sentiment could become bullish due to demand fundamentals displaying robust support for elevated prices. Using reported figures for his estimates, Mr Badiali believes the planet will have to produce 5m metric tons of copper monthly by 2030 — around 2.5 times more than it is set to generate in 2019 — to meet projected EV sector demand.

Electric cars are estimated to contain between four and 10 times as much copper as conventional ones and mining projects currently in the pipeline will likely be insufficient to meet anticipated rising demand from 2025. Brokers and charterers should prepare for a surge in copper trade as and when demand for EV cars really accelerates.

The Baltic Exchange will hold its next Shipping Economics & Investment course on 13 and 14 January 2020 in  London. More information can be found here.