Copper in bottoming process, strong recovery expected in 2023

If the world is running low on copper, with the global inventory down to just 4.9 days of consumption compared with a consumption normally measured in weeks, why is the copper price falling?

The answer lies in the difference between copper as an essential commodity and copper as an item of speculative trading ahead of next year’s widely-tipped economic downturn.

Dr Copper, as it is sometimes called, is the commodity world’s equivalent of Punxsutawney Phil, the large rodent made famous in the movie Groundhog Day because of a belief that the timing of his emergence from hibernation could predict when winter would end.

Right now, copper traders believe that Punxsutawney Copper is forecasting a long northern winter made worse by recession in Europe, war in Ukraine, and rising US interest rates, which are starting to slow consumer demand for manufactured goods.

It’s in the financial markets where the immediate problem lies as speculators head for the copper exits, prompted by banks such as Citi, Macquarie, and Goldman Sachs, which are warning that the copper price could stay low in the first half of next year.

Citi reckons copper could slide from its current US$3.45 a pound to US$2.80/lb in the March quarter of next year. Goldman Sachs is a little more optimistic, expecting copper to end this year at US$3.36/lb before starting to recover in the second quarter next year.

Copper come-back

But once the northern winter blows over copper will be marching higher, quickly reclaiming a price of US$4/lb, on its way back to an all-time high of US$4.54/lb, which Goldman Sachs sees as the hugely attractive long-term price for the metal.

The difference between the negative view of financial markets towards copper and an examination of the physical side of the industry highlights the two sides of the copper coin and supports the case for a price bounce next year.

The positive case can be found in examples such as:

• One of the world’s biggest copper miners, Chile’s state-owned producer Codelco has reported its customers are demanding longer-dated contracts because they’re worried about future availability of the metal. Customers in Europe have recently signed three- and five-year contracts rather than the usual one-year contract.
• Trafigura, a leading commodities trading company announced at a mining conference in London that the copper market is running on 4.9 days of global consumption and is expected to finish the year at 2.7 days.
• Richard Adkerson, long-term, chief executive of the world’s biggest stock-exchange listed copper producer, Freeport-McMoRan, said during a conference call last week that copper prices “do not reflect a strikingly tight physical market with customers fighting to get product”, and
• Wood Mackenzie, a leading commodity research house, is forecasting a massive jump in demand for copper from the electrification of cars, homes, and industry, which will require the investment of US$23 billion a year in new copper mines.

Possible surplus?

It’s the copper outlook seen by Adkerson, Trafigura and Wood Mackenzie which sits at odds with the US$1/lb decline in the copper price over the past four months and concern from some copper bears such as Macquarie, which reckons there will be a big surplus of the metal next year.

Marcus Garvey, head of commodity strategy at Macquarie, says all industrial metals will move into surplus conditions next year as recession bites into demand.

But that view from a banker is in conflict with people like Adkerson who said Freeport was not seeing any scaling back of orders for next year and the price does not reflect strong Chinese demand even as its economy grows at its slowest pace in decades.

Copper stocks poised for recovery

The optimistic outlook also explains why BHP (ASX: BHP) is trying to buy more copper (and nickel) through its takeover bid for OZ Minerals (ASX: OZL) and a large number of small copper stocks are probably bouncing along the bottom before next year’s recovery.

Included in that list of small copper stocks are:

• QMines (ASX: QML), which earlier this week reported high grade assays from drilling at its Mt Chalmer project in Queensland.
• Revolver Resources (ASX: RRR), which last week reported an increase in the footprint of its Dianne project also in Queensland.
• Cyprium Metals (ASX: CYM), which is redeveloping the Nifty copper mine in WA.
• Power Minerals (ASX: PNN), which owns the Musgrave copper, nickel, and cobalt project in central Australia, and
• New World Resources (ASX: NWC), which two weeks ago reported the best ever assays from drilling at the Antler copper project in Arizona.

For investors those small copper players, along with stocks such as Staveley Minerals (ASX: SVY) which has copper as a secondary target to gold in its Victoria projects, are all close to 12-month share price lows, having been sold down as the copper price contracted.

But as copper improves after the northern winter chill it will be the smaller stocks which deliver the biggest percentage increase, assuming the banks are right with their copper forecasts.

Citi’s latest copper comments start with an expectation of another down leg “as a winter demand crunch looms” with a 70% probability that the price will go as low as US$2.80/lb over the next three months.

Copper price rebound

But towards the end of next year Citi reckons copper should have rebounded to US$3.63/lb, on its way back to US$4.10/lb in 2024.

Wood Mackenzie pushes the price out further with US$5/lb, a level needed to incentivise investment in new mines.

Macquarie, despite the warning from Garvey, has buy recommendations on the three mid-tier copper stocks its follows, Sandfire Resources (ASX: SFR), 29 Metals (ASX: 29M), and Aurelia Metals (ASX: AMI).

The next three-to-six months are likely to be a testing time for all mining companies as the effects of Europe’s recession, the Ukraine war, rising US interest and uncertainty about China’s economic policies test demand for commodities.

But if there’s one metal poised to bounce back after the northern winter its copper because the world needs more and there are not enough new mines being built.