Copper: Will Worst Bearish Streak In A Quarter Century Continue?

Seven straight months of losses and counting: Copper is having its worst bearish streak in 25 years, with no immediate certainty of a rebound as inflation at near four-decade highs, aggressive central bank rate hikes and the potential of a global recession take their toll on prices of the so-called red metal.

As trading for November began, copper’s front-month futures hovered at just under $3.38 per lb on the COMEX division of the New York Mercantile Exchange. That was 40% lower from its March settlement of $4.75 and 50% off from the record high of $5.04 attained that same month.

Charts courtesy of SKCharting.com, with data powered by Investing.com

The last time copper prices fell seven months in a row was in 1997, when it fell from $1.165 at the end of May that year to a mere 78 cents before the start of 1998. 

No one really expects copper to go below $1 levels this time, let alone slip beneath the $3 support it has held since November 2020.

Those studying the fundamentals of copper, however, cite a serious disconnect between the demand side of the so-called red metal and the market’s refusal to forward-price the commodity accordingly.

The situation isn’t too different from that of lithium, they say, before the explosion of the electric vehicle industry that sent prices of the battery-making material to orbit. 

Barry Fitzgerald, an independent analyst and writer on copper, said in a blog that ran on livewiremarkets.com on Friday that a “parade of non-equity market players that reckon the copper market is headed for a mighty supply deficit as the industry struggles to keep up with the demand coming from the world’s decarbonisation efforts”.

Fitzgerald adds:

“The copper price is down heavily for the year, but at $3.40/lb it is still at a level that only the most challenged of mines don’t make money.”

“At some point, the seemingly unattainable supply challenge will force an increase in the copper price to the incentive levels required to encourage more production. Whether that means a 30-50% increase in prices for the red metal remains to be seen.”

New voices warning that a copper supply crunch is also coming include those from the commodity consultancy firm Wood Mackenzie and one of the world’s biggest commodity traders, Trafigura.

WoodMac said that decarbonization “presents an almost unattainable mine supply challenge, with significant investment and price incentives required”.

Under its accelerated energy transition scenario, 9.7 million tonnes of new copper supply—the equivalent of nine Escondida’s, the world’s biggest copper mine owned by BHP (NYSE:BHP) and Rio Tinto (NYSE:RIO) in Chile—is needed over 10 years.

“To successfully meet zero-carbon targets, the mining industry needs to deliver new projects at a frequency and consistent level of financing never previously accomplished,” WoodMac said.

“In theory, higher prices should encourage project sanctioning and more supply. However, the conditions for delivering projects are challenging, with political, social, and environmental hurdles higher than ever. For example, social and environmental licenses to operate are proving elusive in major producing countries, including Chile and Peru.”

There is also a more current concern that there is actually a supply squeeze already taking shape regardless of the concern in equity markets that the copper price will remain under pressure because of recession and the China slowdown.

At the Financial Times Mining Summit two weeks ago, the co-head of metals and minerals trading at Trafigura, Kostas Bintas, noted that current copper inventories are now measured in days rather than the norm of weeks of coverage.

“While there is so much attention being paid to the weakness in the real estate sector in China, quietly, the demand for infrastructure, electric vehicle-related copper demand, more than makes up for it,” the FT reported Bintas as saying.

“It actually not only cancels completely the real estate weakness, but also adds to their consumption growth increase.”

But some also warn that copper risks coming to even lower $3 support levels if inflationary pressures do not recede enough for global central banks to back off from their rate hike regime that could send the world economy into a recession. 

The Federal Reserve and the Bank of England are all but certain to deliver jumbo 75 basis-point (bp) rate hikes on Wednesday and Thursday, respectively, as the battle against price pressures continues. 

Financial markets are pricing in a smaller 50 bp rate hike at the Fed’s December meeting and another 50 basis points over the first two meetings of next year. But all that will depend again on where inflation sits.

Inflation, as measured by the Consumer Price Index, stood at 8.2% for the year to September, not too far from the 40-year peak of 9.1% during the 12 months to June. 

The Fed’s target for inflation is a mere 2% a year and it has said it will not back off on interest rate hikes until it achieves its aim. Since March, the central bank has raised rates by 300 basis points from an original base of just 25. The Fed intends to add another 125 basis points to rates before the year-end.

Investors, economists and business leaders have warned for a while that the world’s largest economy was on the verge of a downturn—just 2.5 years after the last recession that broke out with the coronavirus pandemic in mid-2020.

In the meantime, the Fed’s rate hikes have propelled the dollar to its strongest standing in 20 years against a basket of foreign currencies led by the euro. A strong dollar is an anathema to dollar-denominated commodities such as copper as it raises the transaction/acquisition costs for commodity traders using the euro and other currencies.

So how much more could copper lose in the near term, before it hits a critical point for a rebound?

Probably not too much, says Sunil Kumar Dixit, chief technical strategist at SKCharting.com, who adds:

“Copper futures need to break out of the price triangle they’ve been trapped in and make a sustained break above the previous week's high of $3.36.”

“That would be seen as initial confirmation of a potential further breakout towards the 50-week Exponential Moving Average of $3.87.”

Dixit said standing in copper’s good books were long-term monthly charts suggesting the metal has completed a 61.8% Fibonacci correction of its major up move.

“A long consolidation and accumulation may be brewing for a bigger rally ahead.”

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.