Copper price poised to surge
Copper market fundamentals are becoming increasingly bullish for the price. Concerns around the slow-down in China and the impact of a hawkish fed have kept bullish investors on the side-lines, but no real bearish narrative has emerged.
2022 now looks like a 100,000 t deficit market thanks to strong Chinese copper demand, despite the negative headlines. China stimulus and potentially strong post-Chinese New Year buying, against a backdrop of low inventories and an ability to ride out and even benefit from the inflation/fed tightening story, point to a sharp rally in the copper price to over $5.40 /lb this year.
In China, the government has been pulling multiple policy levers from interest rate reductions to advancing special purpose bond quotas. That makes us more confident of a post Chinese New Year pick-up in demand, especially as cathode inventories are low.
A deficit in 2022 comes despite the miners giving their absolute best to boost supply. Mine supply increased by over 3% in 2021, the largest increase in annual output since 2016 and production growth is set to peak this year. We have also upgraded 2022 growth, the largest contributor to the increase is the Kamoa-Kakula mine in DR Congo.
Supply growth tapers off from 2024 as supply from existing mines starts to contract. There is a shortage of new projects which can deliver the much-needed supply growth from 2024-2026.
Given the mine supply backdrop, the copper market is meant to be in surplus now, and it is not. Copper demand from renewables and EVs continues to strengthen, and that narrative is not going away any time soon.
Investors are not positioned for the upcoming rally
We see speculative short positioning on COMEX at the low end of the range seen over the past three years. While concerns around Chinese growth and the Fed have held back long interest, it has not encouraged any new short interest of note. This will not be a short covering rally.
Figure 1: Short speculative concentration COMEX copper
The bullish flow will come from new long positions. Many investors have been looking to buy cheap and catch the green copper demand story. Late January may prove to be the last “buy the dip” opportunity for copper in 2022, before the market rallies post Chinese New Year.
Figure 2: Long speculative concentration COMEX copper
Copper market is not ready for sanctions on Russia
Sanctions against Russia are nearly certain if an invasion of Ukraine occurs. The White House briefed the press on 25 January, the message was not if sanctions would occur or not, but rather “the size of the financial institutions and state-owned enterprises that we’re willing to target, the severity of the measures that we’re contemplating, the immediacy of the effect of sanctions that we’re preparing.”
Given how low copper inventories are sanctions against Russia would likely send prices substantially higher. The energy exposed metals (aluminium and zinc) would rally more than copper, given the impact on gas and energy costs in Europe and the risk of smelter closures.
Platinum and palladium are a risk, but in the past the US has been hesitant to sanction anyone related to the palladium supply chain, given Russia’s very large market share.
Copper faces a larger risk of sanctions by that measure. It is worth saying that Russia has had an export tax on copper through 2021 Q4, which ended on 1 January. This did not disrupt the market greatly, but it was always likely to be a temporary tax and the material could still flow out of Russia.
Another risk to consider is logistics. If Russia is exporting via the Black Sea, then even without sanctions we could see disrupted supply chains if there is conflict.
Figure 3: Russia share of global non-ferrous metals supply in 2021
Lessons from the UC Rusal aluminium sanctions in 2018
Once sanctions are in place, a company can be blacklisted by financial institutions around the world. Doing business with a sanctioned company is too risky for banks, as they could face enormous fines.
The US learnt that sanctions against a raw materials supplier can be very disruptive to manufacturing around the world. You cannot easily disentangle supply chains and have a clear picture of which industries may be impacted by sanctions. For instance, UC Rusal has a large alumina refinery in Ireland. The halting of shipments from that refinery to aluminium smelters in Europe was nearly as disruptive as the halting of metal exports from Russia.
To limit disruptions to manufacturing, it is highly likely that any existing contracts would sit outside of sanctions. That will likely be the case but is not certain. There are some potential problems though which can be difficult – the Russian company may not want to supply, if they feel that accessing the cash payment is too burdensome or risky.
It is important to note that lawmakers initially underestimated the impact of the UC Rusal sanctions and it was only after substantial lobbying that rules were tweaked. Metal inventories are so low today, that a replay of that error would be explosive for prices.
