The price of copper has surged over the past eight weeks and is now trading near US$10,000 a tonne again. (A tonne is also known as a metric ton.) What can we understand from this price increase and where is it heading from here?
Background
The term Doctor Copper is market lingo for this base metal that is reputed to have a “PhD in Economics” with its ability to predict turning points in the economy. Because of copper’s widespread use, demand for copper is viewed as a leading indicator of economic health. The correlation of the year-over-year change between the price of copper and the U.S. Purchasing Managers Index (PMI), as well as the S&P 500 index, suggests this base metal is a reliable indicator of economic cycles.
Baseline data
The top six copper-producing countries (in million metric tons per year or Mmt) are Chile (5 Mmt), Peru (2.6 Mmt), Democratic Republic of Congo (2.5 Mmt), China (1.7 Mmt), the United States (1.1 Mmt) and Russia (0.9 Mmt). Global copper reserves are estimated at 870 Mmt with annual demand at 25 Mmt. Copper production as of 2022 figures is in the range of 22 Mmt with the difference made up from recycled copper.
Copper consumption is driven by China (8.7 Mmt), EU/Britain (2.1 Mmt), North America (1.4 Mmt), South America (0.8 Mmt) and ASEAN, or Association of Southeast Asian Nations (0.8 Mmt). China imports copper from the Democratic Republic of Congo (21 per cent of total imports), Chile (19 per cent), Russia/Kazakhstan (16 per cent) and 5 per cent each from Japan and Australia.
China
Given China is such a large copper consumer we need to understand growth there. One way to do that is though PMI data via the Caixin China General Manufacturing PMI. Like other PMIs, a reading above 50 represents growth and below 50 shows a contraction in manufacturing activity. That index has shown growth for four straight months in China for the first time since 2021. The services sector also expanded for the 14th consecutive month, indicating an overall economic recovery in China. The Caixin China General Manufacturing PMI reading for March will be published on Tuesday. For reference, the Manufacturing PMI in the United States was 50.3 for March of 2024, the first time it has been above 50 since November of 2022.
Russia sanctions
On April 13, the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) banned Russian metals produced on or after that date to comply with sanctions imposed on Russia for its invasion of Ukraine. This ban will have a twofold impact on the global copper market as it is expected China will now source more Russian copper, and global copper prices will be more influenced by trading on the Shanghai metals exchange.
Where are copper prices heading with this backdrop?
Longer-term projections see demand rising from the current 25 Mmt to as much 33 Mmt, driven by the global electrification phase we are in. It takes 10 years or more for a new copper mine to go from prospecting to production, and so it is expected production will not keep up with supply, leaving an annual deficit of as much as 6 Mmt by 2030. Prices in the next two years could reach US$15,000 a metric ton according to a number of analysts. Interest-rate cuts would weaken demand for the U.S. dollar and in turn bolster demand for commodities priced in U.S. dollars, also adding to upward price pressure.
Interestingly, there is a basis for copper and aluminum substitution when the price of copper trades about four times higher than the price of aluminum. Aluminum conductor is less desirable as it requires a 50-per-cent larger cross-sectional area to carry the same current as copper conductor, is not as strong and has a higher thermal expansion. The price ratio currently sits at 3.8 times.
Dr. Copper seems to be telling us growth is back on the table. We should expect copper prices to remain at or above current levels for the foreseeable future barring a recession. We would also expect exploration and mine expansion to increase, given the price outlook.
More about the author
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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