One of the greatest scientists of our times, Michael Faraday, preferred ‘Copper’ to gold and silver because ‘That which is convenient, is that which is useful, and that which is useful is that which is valuable’.
The convenience of this maverick metal can be fully understood when we see the list of industries in which Copper is the lifeline….
- Electricity generation, transmission, circuitry,
- Medical appliances
- Cooling systems
- Navigation systems
and many more.
What are the dynamics that contribute to push and pull of the Copper prices in the global markets, after 2020? – A year that saw something that has made every trader worth his salt, sit up and track this astonishing metal for its potential in brilliant moves. Picture this –
LME Copper price quotes($/MT):
|Jan 1960||Jan 2020||March 2020||May 2021||Sept 2021|
(-) 85% (+)132%
- The 2000’s saw phenomenal demand for copper in terms of auto and appliance ownership. It was not a short phase, and perceived as a point of no return. This indicated to the world that there could not be a major reversal, unless a perfect substitute to the metal, could be found.
- It was then that the pandemic happened. Mining, just like other industries, was hit, but remained operational, slimly. However, industrial productivity was also hit, though demand soon picked up, on the back of the stimulus packages rolled out by US, China and Europe.
- With demand outstripping supply, prices would have been unidirectional, except for a variety of other reasons which have impacted market dynamics, such as:
- Copper mining is heavily regionalized, with Latin American countries like Chile and Peru accounting, for more than one third of global production, making them key negotiators of price. Correspondingly, demand for copper emerging from China was impactful, making it put pressure on global markets and spike copper prices, whenever imports of the red metal was seen to go up (and vice versa).
- Newer production technologies which have brought down cost of production of smelting and refining copper.
- Lag between forecast for copper prices of demand and production time, mainly in development of mining infrastructure. It is said that it takes 5 – 7 years to get a mine operational after discovery of its presence.
- Miniaturization of metal parts leading to dampening demand, inspite of increasing functionality of the metal.
- Existence of a primary and secondary (recycled) market of sizeable quantum in case of copper and ever-increasing ratio of the latter.
- Existence of vested interest and cartels which use agglomeration to defeat market dynamics.
- Behaviour of producers and consumers, impacted by other factors which may be irrational, leading to volatilities that defy fundamentals
- Industrial action from labour unions, especially after the pandemic, with demands relating to health anxieties on account of longer hours and mental overhang.
- Shifting of sourcing the ore, from traditional geographies (Latin America) to alternate countries which may not be not as hospitable
The polemics of copper prices in the last year, priced-in all of the above factors. Its technical analysis shows that a level of $4.76/lb, (which has been revisited by the metal a few times, but never been breached) has become a major resistance, surmounting which will be a struggle.
The exponential future demand for copper emerges from the hypothesis that Electric Vehicles would use the metal five-fold times more. Further, the use of copper in manufacturing digital, backup and storage devices would be dependent on copper, no matter the price. Also, construction activity is likely to pick up, once the pandemic recedes. The International Energy Agency predicts that by 2040, copper demand is likely to double, widening the supply gap to the extent of about 8.2 m tonnes by 2030 itself. If we are committed to the Green initiative of net zero emissions by 2050, there is no bowing down to the sub $ 4 levels.
Having said that, which fool or wiseman said ‘Every Bull market has a Copper roof’? Maybe he is the environmentalist who targets a ‘Recycling Input Rates’ (RIR) of 75% or more for the top 10 Cu users (China, Japan, S.Korea, India etc.) and thinks he can make them achieve it.
Or, maybe he foresees political turmoil, leading to breakdown of trade relations, dampening copper prices and its upward momentum.
Or….Will Dr. Copper end up at $15,000 or $20,000/MT levels and outsmart the naysayers and skeptics making it a sound buy, in the long run?