While copper had a good start to the year, benefiting from the broad reflationary trade that lifted all the metals, it has come under pressure since its peak in May mainly due to a deterioration in the macroeconomic environment.
The peak in copper prices came at the same time as the United States dollar started to bottom out, and slightly after the G3 (China, US, Europe) credit impulse peaked. Weakening credit growth could be a headwind to copper prices from a macro perspective over the coming quarters.
View the copper prices in this article
Fundamentally, copper has benefited from positive supply-demand dynamics. The tightness in the physical market and the high copper price environment have even led China to release some of its strategic copper reserves. In addition, Chinese authorities have issued warnings to domestic metal companies to prevent any market manipulation to the upside.
Based on our supply/demand estimates, we think the deficit in the global refined copper market deepened this year, to nearly 900,000 tonnes, following a deficit of 530,000 tonnes in 2020. This is because refined demand growth has accelerated faster than refined output growth. While we estimate refined output growth at 1.9% this year, we forecast refined demand growth at 3.2%.
Going into 2022, we expect refined output growth (+6%) to outstrip refined demand growth (+1.3%), although the market should remain in deficit, thereby pushing visible inventories still lower and exerting upward pressure on spot prices.
While the ‘green transition’ is a key theme for copper, we do not think that copper demand from new energy will have a material impact on the market balance next year. We view it is a positive long-term force, which will be increasingly felt toward the end of the decade.
In the shorter term, the aggressive transition to green energy may have unintended negative consequences, such as soaring energy prices, because the pace at which fossil energy capacity declines is greater than at which renewable energy capacity increases. This may, in turn, negatively affect downstream demand for copper and thus prices.
To sum up, while we expect copper prices to remain in an uptrend in 2022 and dips to be bought, we think the upward path will be much less steep than it has been so far.
What buyers are saying
- Copper supply globally is tight, and the market is forecast to be in deficit for the foreseeable future due to strong demand from the electric vehicle sector.
- Demand for finished material is good, and buyers are currently paying premiums for urgent spot supply.
- Things are happening earlier than usual while people try to get lined up and secure copper supply for next year.
- Negotiation season is going to be difficult this year because no one knows how the economy is going to be and how demand is going to be. There are disruptions in supply chain and as a result it is difficult to assess demand. There will be fewer annual contracts done next year than this year. People might prefer to go on the spot market because they do not know how the demand will be.
What sellers are saying
- Nobody is in a squeeze. For traders, the premium is at 9 cents per lb; they are asking for lower numbers for next year. Consumers are asking for high 7s to low 8s. I would not be surprised if we roll over to the same premium for next year, but I am sure producers will want more.
- Logistics are playing havoc with premiums. Numbers that look high on paper really are not due to additional costs for freight and other charges.
- Some 2021 contracts are now at very unfavorable terms due to the rise in transportation.
- An expected supply rush from Asia, especially China, to the United States has not happened despite very low Asian premiums earlier in 2021. Logistics have been a factor in this.