Copper prices, traditionally a barometer of the global economy, are expected to rise over the next year
Copper, traditionally viewed as a leading indicator of economic health, unsurprisingly had a tough year. However, analysts expect a rebound in 2023, even if the global outlook remains highly uncertain.
Some of Wall Street’s biggest banks have been suggesting in recent weeks that a combination of near-term supply constraints and longer-term demand related to the energy transition will propel the red metal north from here.
The downward pressure in 2022 came in part from continued market expectations for an excess bend in the metals market, driven by expectations of sluggish demand amid slowing global growth and an acceleration in mining activity, strategists at Goldman Sachs said in a week-to-date report Message.
However, this has not materialised, and Goldman emphasized that the cathode market has remained in a “significant deficit (GS estimate 210kt vs. 131kt previously) with global apparent inventories falling to a 14-year low” said metals strategist Nick Snowdown said.
“Equally important, the surplus that we previously expected for 2023 (169kt surplus) is now also gone in our last balance iteration (GSe 178kt deficit),” he added.
The metal – used in many sectors – is also having a tough year due to tighter US monetary policy, the energy crisis stemming from Russia’s war in Ukraine and China’s combination of strict Covid-19 lockdowns and a weak real estate market 2022 behind. LME copper prices peaked at over $10,600/t in March this year.
Should China’s easing of its zero-Covid restrictions move further towards a reopening of the economy, there will likely be a restocking of inventories, Goldman believes.
“If China were to bring its copper inventory-to-consumption ratio back to pre-2020 levels, it would mean an increase in physical demand of up to 500kt,” Snowdown said.
Three month copper futuresThe London Metal Exchange traded at $8,543 on Monday morning in Europe after posting its strongest month in November since April 2021 on hopes of a boost in demand as China eases its zero-Covid policy.
Goldman last week raised its 12-month forecast to $11,000/t from $9,000/t and raised its average price forecast to $9,750/t for 2023 and $12,000/t for 2024.
Commodity strategists at Bank of America believe copper could surge to $12,000/t in the second quarter of 2023 given the right circumstances. Such a scenario would require the Federal Reserve to pivot towards less aggressive monetary tightening, limiting upside potential in the Federal Reserve U.S. dollarand that demand will remain supported as the planned energy transition accelerates.
“Despite macroeconomic headwinds, physical markets have remained tight, underscoring the lack of available spare copper units,” said commodities strategist Michael Widmer in Bank of America’s 2023 Metals Outlook Report.
Widmer also noted that global copper demand has shown resilience, rising year-to-date as purchases outside of China run at record levels.
While macro headwinds are likely to persist into 2023, Widmer said the decline should remain positive when modeling global GDP growth.
“To take it a step further… China’s grid spending has offset weakness in the broader economy: in fact, the expansion of power infrastructure has fully offset weakness in the housing market,” Widmer said, adding that the key question going forward is whether this a one off or the beginnings of a structural trend.
He also noted that the correlation between global copper demand and industrial production growth has broken down over the past year and a half.
“In our view, this confirms to some extent that green spending has already supported global copper demand and physical markets,” Widmer said.
Data collected by Bank of America on demand growth rates from sectors linked to the net-zero policy points to a 4.5% year-on-year increase in copper consumption through 2030. In contrast, potential demand growth has been 2.1% over the past two decades, Widmer noted.
consensus more cautious
Although Fitch Ratings strategists took a more cautious view last week to reflect weaker market sentiment as a result of the expected global economic slowdown, they suggested that any hit to copper would be offset by “supportive near- and medium-term supply-demand drivers.”
“We expect a modest increase in global primary copper consumption of about 2% in 2023, similar to 2022. Mine supply will grow by about 4% in 2023, although disruptions may affect this,” reads a research note.
“A strongly balanced market and minimal global copper inventories (less than two weeks of consumption) will support prices in 2023. Copper’s longer-term prospects are supported by demand from the energy transition.”
Fitch maintained the copper spot price assumption of $8,000/t for 2023 and decreased to $7,500/t in 2024 and 2025.
However, other institutions remain more pessimistic, at least in the short term. In its 2023 outlook, BNP Paribas forecasts a three-month copper price of $6,800/t in the first quarter of next year, falling to $6,465/t in the second but recovering to $8,250/t by the end of 2024.
“We expect that a decline in European manufacturing activity will amplify the impact of slowing activity in China and the US,” the French lender said.
“Increasing mine supply and accelerated production of Chinese refined copper are expected to push the market into a sizeable surplus in 2023, easing LME spread tightness and weighing on prices.”
