If 2020 was the year for gold, 2021 is shaping up to be the same for copper.
Copper futures hit an eight-year high on Wednesday, trading as high as US$3.84 a pound on the CME. The industrial metal is being driven higher by rebounding global demand, a tightening supply picture and speculative bets tied to copper’s promise as a green-energy constituent of a low-carbon future.
New highs in the price of copper come after the metal hit multiyear lows early in the pandemic, as investors feared COVID-19 would devastate the world economy. But since then, copper has defied the naysayers, rising by more than 80 per cent.
Dennis Gartman, former editor and publisher of The Gartman Letter, a daily market commentary, said the parabolic rise in copper is part of a broader surge in commodity prices globally. That dynamic has seen crude oil, lumber, wheat, corn and cotton rally based on an avalanche of worldwide fiscal stimulus spending aimed at jumpstarting moribund economies out of the COVID-19 deep freeze.
“It’s all predicated upon monetary authorities being egregiously expansionary,” Mr. Gartman said. “Some of these prices have become illogically high, and as Keynes said, ‘The market can remain illogical far longer than you and I can remain solvent.’ ”
Robin Bhar, an independent consultant with London-based Robin Bhar Metals & Mining Consulting, agrees that the copper market is becoming overheated.
“We’ve probably rebounded above what we would regard as fundamentally justified levels, and that’s because speculators have jumped on board,” he said.
Many speculators are now anticipating that the global copper market will soon fall into a deficit.
Citi analyst Alexander Hacking wrote in a note to clients that he expects demand will outstrip supply by half-a-million tonnes of copper this year, and predicted the price of the metal could rise by at least another 20 per cent.
“Structural demand from de-carbonization” could power a “multi-year bull market” in copper, he wrote.
Like lithium and cobalt, copper is used in a variety of green-energy uses, including in electric cars, which are increasingly popular among consumers. Battery-powered electric cars typically use about three times more copper than an internal combustion-powered vehicle. A few weeks ago, General Motors Co. joined the growing list of large automakers making grand statements around the push into low-emission vehicles. GM is aiming to phase out the sale of gasoline-powered cars by 2035.
While green energy could put longer-term pressure on copper supplies, the current supply tightness has much more to do with specific bottlenecks in countries such as China, including a shortage of shipping containers. The copper market will undergo another short-term test on Thursday when Chinese traders return after a week-long break.
“Quarantine measures enforced on migrant workers returning from their Lunar New Year holidays could create bottlenecks in supply chains that would give the recent supply-driven rally additional support,” Bart Melek, global head of commodity strategy with TD Securities Inc. wrote in a note to clients.
Copper peaked in 2011 during the height of the last great commodities boom, reaching US$4.50 a pound. At that time, investors bid up the metal based on the expectation that double-digit economic growth in China would last for a generation. The metal crashed back to Earth post 2012, after Chinese demand suddenly plummeted.
While some are concerned that could happen again, over the longer term, many observers believe the supply picture will tighten significantly. Like the gold industry, there has been a dearth of new discoveries in the copper sector over the past few decades. Against that backdrop, the costs of production have risen, as companies are forced to mine deeper underground to access increasingly lower grades.
“I do worry beyond five years,” Mr. Bhar said. “We’re just not finding the world-class deposits that we did in the sixties, seventies, and eighties.”
Canadian miners are helping to fill some of the void. In late 2019, Toronto-based First Quantum Minerals Ltd. put its Cobre Panama mine into production. On Tuesday, the company said it expects Cobre Panama to produce up to 330,000 tons of copper this year.
Vancouver-based Ivanhoe Mines Ltd. is building a new copper mine in the Democratic Republic of Congo with production expected to start later this year. Meanwhile, Teck Resources Ltd. is building a new mine in northern Chile and is aiming to have it in production in the second half of 2022.
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