Copper’s bull run is losing momentum, a worrying sign of economic growth, and investors are betting that demand related to the shift to electric vehicles would offset a supply surplus.
The price of the metal used to make everything from electrical wiring to roofs fell briefly to below $ 4 per pound this week, an important psychological threshold.
Copper is considered a measure of economic health because it is a key input in a wide range of major tickets such as infrastructure projects and many consumer goods. It even plays a major role in the transition to greener energy because metal is a crucial component in electrification.
Investors in copper and the companies that extract it have had a good COVID-19 crisis since prices rose at the beginning of the pandemic. But copper has fallen more recently as rising interest rates and fears of a global recession have dampened expectations that demand will hold up in the short term.
The change in sentiment about the economic outlook is now testing expectations that long-term demand for copper will offset the disinflationary effect of forecasts predicting surplus production in 2023 and 2024.
“People thought that (copper) demand was robust enough to get through that period of surplus without a real significant drop in copper prices,” said Shane Nagle, an analyst at National Bank Financial. “But the inflationary pressures we have seen, the fear of interest rate cuts and the fear of just a global downturn or recession, are obviously putting demand in jeopardy a bit.”
Now, copper appears to be entering a period of volatility. In March 2020, it started a bull run that rose to $ 4.94 per. pounds at the end of February 2022, from $ 2.17 per pound. pounds at the start of the pandemic – an increase of 127 percent. Since reaching its peak, it has fallen 18 percent to around $ 4 per pound this week.
The trend is hammering at Canadian-listed copper producers. Vancouver-based Teck Resources Ltd. fell 9.2 percent to $ 40.23 per share on June 23; Vancouver-based Ivanhoe Mines Ltd. had fallen 5.4 percent to $ 7.18; and Toronto-based Hudbay Minerals Inc. had fallen 9.2 percent to $ 5.24.
By comparison, the iShares Core S & P / TSX Capped Composite Index, an exchange-traded fund designed to replicate the broader Canadian stock market, was only slightly changed.
Demand from electrification and stable economic growth is expected to push the copper supply to a deficit by the middle of the decade, which bodes well for copper investors in the long run. The question is what happens between now and then.
Over the next two years, the copper surplus is expected to grow as new mines come online. Ivanhoe Mines Ltd. is aims to increase production at its Kamoa mining complex in the Democratic Republic of Congo, which added as much as 450,000 tonnes in 2023 and a further 500,000 tonnes in 2024.
Meanwhile, other mining companies are also close to completing years of multi-billion-dollar projects: Teck Resources Ltd. aims to almost double its copper production in 2023, when its Quebrada Blanca 2 project in Chile goes online, potentially adding 318,000 tonnes a year.
“You can start to see the deficit start to form around 2025, 2026,” Nagle said. “And then maybe there’s a bit of a period of volatility, but the market is going to price some of the favorable long-term fundamentals; it’s just a matter of how short- or short-term the market is going to be in the interim period.”
A global recession is not the only wildcard. Inflationary pressures create tensions between miners and the large, unionized workforce that operates many copper mines, especially in South America.
Earlier this week, the Federation of Chilean Copper Workers announced a national strike after Codelco (Chile National Copper Corp.) said it would close its Ventana smelter. Codelco said it was closing the smelter for environmental reasons, but the response from 25 unions shows how rising inflation could exacerbate tensions with workers and threaten future supplies.
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Last year, BHP Group Ltd. escaped with distress and hardly a strike with workers at its Escondida mine in Chile, the world’s largest copper mine, amid local media reports that they agreed to give each union member a one-time bonus of US $ 23,000, in recognition of the time worked during the pandemic.
In 2017, the same union carried out a 44-day strike that led to a 1.3 percent drop in the country’s gross domestic product.
“In this environment, especially when the cost of living rises, one has to keep in mind that the next time they come to labor negotiations, (unions) may not necessarily be willing to accept some form of one-time bonus payment,” Nagle said. “So if these discussions ended up being a little more controversial, we could see some supply pull out of the market.”