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The price of copper has fallen rapidly over the past six weeks. Copper traded just below US$5 a pound in early March, but is now in a bear market near US$3.42 after dropping more than 30 per cent since the beginning of June. What can we learn from this rapid decline?

The term Dr. Copper is lingo for this base metal that is reputed to have a “PhD in economics” owing to its ability to predict turning points in the economy. Because of copper’s widespread application, demand for the metal is viewed as a leading indicator of economic health. In fact, copper has entered a bear market (down at least 20 per cent from peak prices) before each of the past four recessions.

The top five copper producing countries are Chile (28 per cent of global output), Peru (12 per cent), China (8 per cent), Congo (7 per cent) and the United States (6 per cent). Global copper reserves are estimated at 870 million tonnes. Annual copper demand is about 25 million tonnes and production, as of 2020, is roughly 20 million tonnes, with the difference made up from recycled copper.

The price and output of copper, like other base metals, is driven by supply and demand fundamentals. The factors that have been driving demand include energy storage and electric vehicles (EVs), which can use up to three times as much copper as internal combustion engine autos, with projections of EVs overtaking internal combustion engine cars and trucks by 2033.

Demand from China, the world’s largest copper market, has fallen off because of COVID-19 lockdowns. Manufacturing plants in Changchun suspended operations and construction work was halted in Shanghai, reducing consumption.

One primary supply factor to note is it takes 10 years or more for a new copper mine to go from prospecting to production. When copper prices are down, investment in exploration is also reduced.

Elsewhere, Chile recently announced a tax of 1 per cent to 4 per cent on mines that produce more than 50,000 tonnes a year and has instituted a tax of 2 per cent to 32 per cent (as a function of copper prices) on corporate profits of copper miners. We have not yet seen what impact, if any, these taxes will have. We are also seeing community protests against copper mines in Peru, thereby reducing current and future output from the world’s second-largest copper producing country.

Where are copper prices heading with that backdrop?

According to RBC Capital Markets, copper supply will outpace demand over the next two years, with prices projected to hold around US$3.75 a pound during that time frame. As for mines, Quellaveco in Peru, Timok in Serbia and Quebrada Blanca Phase 2 in Chile are set to begin production between mid-2022 and early 2023 along, with further expansion at Kamoa-Kakula in the Congo, which should fulfill normal demand growth.

For the longer term, analysis by RFC Ambrian on the outlook to 2030 showed refined copper production forecast to be 31.7 million tonnes in 2030, with consumption expected to be about 33.6 million tonnes. Also by 2030, analysts at Rystad Energy project copper demand will outstrip supply by more than six million tonnes.

In summary, we should expect copper prices to remain around current levels for the next two to three years, before starting another upward climb. We would also expect exploration and expansion of existing mines to increase, given that current prices are projected to remain above miners’ all-in sustaining costs. The wild card to all of this is a possible recession, which would take prices down further and slow exploration.

So, is Dr. Copper telling us a recession is in hand? Based on the rapid price decline of copper, along with a yield curve inversion in the U.S., falling home and auto sales, and negative consumer sentiment, Dr. Copper is certainly indicating a recession is either here now or imminent.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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