Factors Driving the Breakout of Copper Prices

By Editorial Assistant

Recent analysts’ reports suggest structural supply underinvestment and tight stock buffers are contributing to a significant tightening in the copper market. According to BHP’s economic and commodity outlook, historical underinvestment in new primary supply and geological challenges are expected to result in major deficits in the medium term. Although there is an opportunity to build a modest inventory buffer in the middle third of the 2020s, deficits are projected for calendar years 2023 and 2024, potentially eliminating the buffer.

Additionally, supply side issues such as labor strikes and protests in top copper-producing countries like Peru, the world’s No. 2 supplier of copper, recently experienced an upsurge in violent protests, placing about 30% of its production at risk, along with unplanned disruptions in mine supply, further complicate the picture of abundant copper.

Looking towards the long-term, the outlook for copper remains positive. The renewable energy sector’s increasing demand and the growing importance of copper in the global energy transition contribute to a strong performance for copper in a bull market. These factors suggest the potential for significant M&A activity and investments in the mining sector as the demand-supply dynamic favors copper.

Jefferies, a prominent global investment banking firm, expects the copper market to enter a period of deficits sooner than previously anticipated. This forecast points to declining inventories and higher prices in the near future. If the price of copper rises from $4 per pound to $6 per pound over the next 2-3 years, copper mining equities are projected to roughly double in value on average.
However, any growth in supply that lags behind the underlying demand may necessitate demand destruction to ensure market balance.

Analysts at Goldman Sachs anticipate that copper and gold will experience the largest immediate price boost in the commodities sector as a result of potential U.S. Federal Reserve interest rate cuts. According to Goldman Sachs, a 100-basis point decline in U.S. 2-year rates driven by the Fed would lead to a 6% price increase for copper and a 3% increase for gold. As of now, three-month copper on the London Metal Exchange is trading at $ $9,273 per metric ton, while spot gold is at $2,338 per ounce. Micro factors such as seasonal inventory cycles and weather are expected to outweigh any significant price effects on natural gas or agricultural commodities.

Goldman Sachs predicts structural supply underinvestment in the copper industry, indicating a persistent scarcity of copper and substantially higher pricing. They expect a significant surge in copper prices over the next year, with projections reaching $12,000 per metric ton by the end of Q1-2025. These forecasts align with Jefferies’ increasingly supportive views on the copper market and the expectation of extended deficits, leading to higher prices sooner than previously anticipated.

The positive outlook for copper prices is further bolstered by the increasing demand for copper in India. Indian copper demand saw an 18% year-on-year increase in 2023 and has experienced a compound annual growth rate of 10% over the past five years. This growth signifies a cyclical upturn and highlights India’s contribution to the global copper demand. The strong growth rates in India’s infrastructure developments, coupled with the rising demand for copper in various sectors, including the renewable energy industry, are significant factors that support the positive outlook for the copper market.