Sheets of copper cathode are pictured at BHP Billiton’s Escondida, the world’s largest copper mine, in Antofagasta, northern Chile on March 31, 2008.
Ivan Alvarado | Reuters
Copper – traditionally seen as a leading indicator of economic health – has unsurprisingly had a tough year. But analysts expect a resurgence in 2023, although the global outlook remains highly uncertain.
Some of Wall Street̵[ads1]7;s biggest banks have suggested in recent weeks that a combination of short-term supply tightness and long-term energy transition-related demand will push the red metal north from here.
The downward pressure in 2022 stemmed in part from persistent market expectations of a surplus in the metals market, driven by expectations of weak demand amid slowing global growth and an acceleration in mining activity, Goldman Sachs strategists said in a note last week.
However, this has not panned out, with Goldman highlighting that the cathode market has remained in a “clear deficit (GS estimate 210kt vs 131kt previously), with global visible stocks falling to 14-year lows,” says metals strategist Nick Snowdown. so.
“Equally important is that the surplus we previously expected for 2023 (169 kt surplus) has also now disappeared in our latest balance iteration (GSe 178 kt deficit),” he added.
The metal – used in many sectors – has also endured a tough 2022 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 property market. LME copper prices peaked at over USD 10,600/tonne in March this year.
Should China’s easing of its zero-Covid restrictions move towards a reopening of the economy, the recovery is likely to play out, Goldman believes.
“If China were to return the copper stock-to-consumption ratio to pre-2020 levels, that would mean as much as a 500 kt increase to physical demand,” Snowdown said.
Three-month copper futures on the London Metal Exchange traded at $8,543 on Monday morning in Europe, after posting its strongest month since April 2021 in November on hopes of a pick-up in demand if China relaxed its zero-Covid policy.
Goldman last week raised its 12-month forecast to $11,000/t from $9,000/t and upgraded its average price forecast to $9,750/t for 2023 and $12,000/t in 2024.
Bank of America commodity strategists believe copper could rise to $12,000/ten in the second quarter of 2023, given the right circumstances. Such a scenario would require a shift from the US central bank towards less aggressive monetary policy tightening, limiting the upside in American dollarand that demand remains supported as the planned energy transition accelerates.
“Despite the macro headwinds, physical markets have remained tight, highlighting the lack of copper spares currently available,” commodities strategist Michael Widmer said in Bank of America’s 2023 Metals Outlook report.
Widmer also noted that global demand for copper has proved resilient, rising year-to-date this year as purchases outside of China are at record highs.
While macroeconomic headwinds are likely to persist into 2023, Widmer said the slowdown should remain positive when modeled on global GDP growth.
“Taking this a step further … China’s grid spending has offset weakness in the broader economy: indeed, the build-out of the electricity infrastructure has completely offset the weakness in the housing market,” Widmer said, adding that the key question going forward was whether this is a one-off or the beginning of a structural trend.
He also noted that the correlation between global demand for copper 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 demand for copper and physical markets,” Widmer said.
Bank of America’s collected data on demand growth rates from sectors linked to net-zero policies indicated an increase in copper consumption of 4.5% year-on-year until 2030. In contrast, potential demand growth has been 2.1% over the past two decades, noted Widmer.
Consensus more cautious
While taking a more cautious view to reflect softer market sentiment as a result of the expected global economic slowdown, strategists at Fitch Ratings suggested last week that any hit to copper would be offset by “supportive short- and medium-term supply-demand drivers.”
“We expect a moderate increase in global primary copper consumption of around 2% in 2023, similar to 2022. Mine supply will grow by around 4% in 2023, although disruptions may affect that,” they said in a research note.
“A tightly balanced market and minimal global copper stocks (less than two weeks’ consumption) will sustain prices in 2023. Copper’s long-term outlook is supported by demand from the energy transition.”
Fitch maintained a spot copper price assumption of $8,000/t for 2023, falling to $7,500/t in 2024 and 2025.
However, other institutions maintain a more bearish view, at least in the short term. BNP Paribas, in its 2023 outlook, forecast a three-month copper price of $6,800/tonne in the first quarter of next year, falling to $6,465/tonne in the second, but recovering to $8,250/tonne by the end of 2024.
“We expect a fall in European manufacturing activity to add to the effect of slowing Chinese and US activity,” the French lender said.
“Rising mine supply and accelerating Chinese refined copper output are expected to push the market into a significant surplus in 2023, easing the LME spread and weighing on prices.”