Copper prices: Can tight inventory levels offset China growth fears?
15:00, 16 August 2022
Copper has seen a gain of about 8% already this month and is currently trading at about $3.6 per pound. This has largely been due to falling stockpiles at London and Shanghai exchange registered warehouses, with Shanghai recently reporting reserves falling to a 7-month low.
Ongoing supply chain issues at several mines across key copper producing Latin American countries are also contributing heavily to copper shortages right now. This has been coupled with China unexpectedly also cutting interest rates, which have lent support to copper prices so far.
Copper prices have risen more than 8% this month
Why has copper risen more than 8% this month?
On August 15, China has announced a surprise interest rate cut, in its benchmark one-year loan prime rate, by 20 basis points, to about 3.6%. The five-year loan prime rate on the other hand saw a 10 basis points cut, to about 4.7%. This was done to provide more stimulus to the economy which is still struggling to recover from ongoing coronavirus cases as well as intermittent lockdowns.
These rate cuts have provided support to copper prices. Along with this, falling copper stock piles in both London and Shanghai have caused soaring prices, as copper is one of the most vital metals used in manufacturing and industry across the world.
Not only that, but a number of copper miners, such as Antofagasta (ANTO) have also recently cut copper production guidance, due to ongoing drought, inflation as well as maintenance issues. Vale (VALE) has also cut its copper production guidance, due to maintenance at its Sossego mine in the Amazon taking longer than expected and disrupting output. BHP (BHP) has also joined these ranks.
Flooding in a number of Mexican mines have also contributed to tighter supplies, as global supply chain networks have still not recovered to pre-pandemic levels. However, disappointing industrial output from China could work in putting a cap on copper’s gains in the near future.
The recent US Inflation Reduction Act has also provided a significant boost to copper prices, as well as still rising energy prices from the fallout of the ongoing Russia-Ukraine war. This has prompted several investors and manufacturers to look towards investing in renewables as soon as possible, before energy prices have a chance to go higher, thus boosting copper demand as well.
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Which are the main copper miners impacted?
Antofagasta (ANTO) has been one of the top miners benefitting from rising copper prices, even as the miner faces its own operational issues, with the company’s share prices rising about 17% since mid-July. However, the copper miner has also decreased its full-year output expectations from 660,000 to 690,000 tonnes to about 640,000 to 660,000 tonnes.
Vale (VALE) is another copper miner which has seen some gains in recent times, rising about 8% since mid-July as well. The company has also announced a decrease from 330,000 to 355,000 tonnes of copper this year, to about 270,000 to 285,000 tonnes.
BHP (BHP) has also risen more than 18% in the same time, as JP Morgan (JPM) warned that the mining giant may produce about 70,000 to 287,000 tonnes of copper less next year, than its previous forecasts.
What is the outlook for copper for the rest of the year?
Although copper has seen a good month so far, the base metal is currently facing some weakness due to disappointing Chinese industrial output and other economic data, which has fanned concerns of slow economic recovery in the metal’s top consumer.
Copper prices are also considered to be a warning sign of recession. According to ANZ, the currently dipping copper prices reflect investor sentiment regarding the state of the economy as a whole, and could mean that more people are starting to expect a global recession. These worries are largely fuelled by the US Federal Reserve’s aggressive monetary tightening policy.
However Australia’s Officer of the Chief Economist, which is the government commodity forecaster has a more positive outlook for copper believing that prices are likely to trade in the range of $4.3 per pound for the rest of the year, moving slightly lower to about $4.13 per pound in 2023.
The recent US Inflation Reduction Act may provide some initial support to copper prices in the short to medium term, but in the long term, how well the central banks handle inflation will be paramount in deciding the direction of copper prices.
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