Copper prices crash but for how long?

Copper prices crash Citigroup rebound demand supply
Copper prices have slumped over 15% since their recent highs in June.

Rising trade tensions between the United States and China have been blamed for a crash in world copper prices and concerns that the commodity might struggle to recoup its former glory.

Benchmark copper on the London Metaal Exchange is currently sitting at US$6,072 per tonne, near the one-year low of US$5,981/t set earlier this month, and down over 16% from recent highs of US$7,261/t reached in mid-June.

Aluminium and nickel prices have also fallen, pushed down by a stronger US dollar and fears that demand will be damaged by a global trade war and weaker economic growth in top consumer China.

Fuelling the fears has been an announcement last month by US President Donald Trump, warning of plans to impose hefty tariffs on US$50 billion worth of goods imported to the US from China each year.

The move caused financial markets to falter at the prospect of a trade war between the world’s two largest economies.

At the time, China vowed to match the president’s tariffs to the same value on US imported products, targeting items from airplanes to soybeans.

The tit-for-tat was in stark contrast to events in March, when copper prices rose marginally after reports of behind-the-scenes talks between the US and China fuelled hopes that global tensions would ease.

But by last week, world financial markets were unnerved again when President Trump vowed to extend the tariffs to the roughly US$500 billion of Chinese imports annually, paving the way for a trade war between two of the world’s largest economies.

The tariff tensions have impacted a number of metals, with copper among the most dramatically affected.

China is the world’s biggest consumer, and one of the world’s largest producers of copper, and trade restrictions could potentially damage economic growth and metals demand via disruptions to global manufacturing supply chains, increased input costs and prices for consumers.

And with China currently ranking as the world’s top consumer of many raw materials, a heightened trade war could continue to have a heavy effect on commodity prices.

The China factor

Copper has long been a volatile commodity.

World copper prices reached historic highs in February 2011 at over US$10,000/t, before commencing a prolonged slide to seven-year lows of around US$4330/t in early 2015 due to slowing Chinese demand and burgeoning supply as producers ramped up output in expectations of the demand witnessed in 2011.

Today, China still accounts for approximately 45% of global copper demand, driven primarily by domestic construction activity and the growth of its industrial sector. Its ranking ensures that any economic activity has a direct impact on copper prices.

In February, for example, customs data showed the imports of raw materials into China had weakened sharply, and this precipitated the beginnings of another downward spiral for copper.

Prices have since fallen around 15% this year to-date and if the metal is considered as a barometer of world economic health, it may well be a while before a true copper recovery takes place.

Labour disputes such as last year’s 43-day long strike at BHP Billiton’s (ASX: BHP) giant Escondida copper mine in Chile, show the potential and serious impact that economic unrest can have on supply.

That particular strike cut global production by up to 7% in 2017 and had a knock-on effect of pushing up copper prices by a similar percentage.

Last month, a new round of labour talks was triggered by a contract proposal from unionised workers at Escondida, prompting an “aggressive sell-off” of copper amid uncertainty of what impacts another strike would have on supply, demand and price.

Sustained long-term demand

But it’s not all doom and gloom for the red metal.

Some experts have predicted a rather rosy future, believing copper’s prolonged price dip offers a long-term buying opportunity with a view to stronger prices over the coming decade, as the metal becomes more difficult and expensive to mine.

Citigroup Inc is cautiously optimistic, believing the commodity will rise from the ashes to eventual annual prices of around US$8000/t in 2022, passing US$9000/t by 2028.

The bank said its forecasts from 2023 onwards are based on a new long-term price of US$7500/t, assuming 2% annual inflation and up from an earlier outlook of US$7000/t.

Copper prices crash June 2018
Copper prices in US dollars over the past three years.

The International Copper Study Group had similar sentiments when asked about the metal’s role moving forward.

“Sustained growth in copper demand is expected to continue because copper is essential to economic activity and even more so to the modern technological society,” the group said.

“Infrastructural development in major countries such as China and India will continue to [fuel] growth in demand.”

Over in the electric vehicle space, copper is also expected to become a star player with studies showing EVs utilise up to four times the amount of copper used in traditional combustion engines.

According to Citigroup, conventional cars use 23 kilograms of copper compared to 51kg in plug-ins and 77kg in EVs.

Copper is also a component of the lithium-ion batteries used in EVs and in the charging infrastructure needed to keep them running.

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