The opinions expressed in this report are those of CRU Group and are considered market commentary. They are not intended to act as investment recommendations. Full disclaimers are available at the end of this report.

With the market already pricing a high probability of a recession in Europe and the U.S. next year and an increased likelihood the Fed will need to remain aggressive in its tightening for longer, it could be argued much of this challenging near-term outlook is already reflected in copper prices. However, elevated uncertainty associated with key factors weighing on markets, especially future developments in the war in Ukraine and the inflation outlook, add to difficulties in forecasting the short-term outlook.

Beyond the near-term economic slowdown, the key drivers of copper’s outlook remain supportive – specifically, green energy transition (GET) demand drivers and ongoing concerns over the ability of mine supply to meet this demand in the requisite timeframe. Furthermore, the energy crisis triggered by the war in Ukraine is expected to accelerate the transition to renewable energy, which is expected to be supportive of the medium term copper demand outlook.

Our latest revisions have seen our estimates of global refined copper consumption growth in 2022 and 2023 virtually unchanged at 1.7% and 2.1% respectively, although there have been more significant changes at country and regional levels.

We have increased our China refined copper consumption growth estimates for 2022 from 1.3% to 2.2% and for 2023 from 1.5% to 1.9%. Chinese economic data has generally fallen short of expectations this year, particularly residential property, which has seen construction starts in recent months down around 45% y/y. However, this weakness has been offset by growth in green energy uses – electric vehicles and renewable energy, as well as strong exports of copper semis (wire and cable). Refined copper demand has also benefited from tight copper scrap availability in recent months.

In Europe, semi-fabricators generally continued to fill September and October order books but there are question marks against customer demand during the balance of the year and into 2023. Regional ex. Russia demand growth has been downgraded from 1.4% to 0% in 2023, although availability of substitutes for Russian cathode is a concern for next year.

U.S. cathode demand has been revised down by ~80,000 t in 2022 and 2023, due to wirerod capacity constraints. While East Asian copper demand growth should accelerate next year as the region benefits from some recovery in the Chinese economy. Consequently, world ex. China refined copper consumption is expected to grow by 2.4% (previously 2.7%) in 2023.

Global exchange copper stocks remain low, down 22,786 t (-8%) m/m in October, equivalent to around half a week of consumption. Following a sharp decline in visible stocks in China in recent months, stocks increased by 21,300 t in October. Concerns over potential restrictions on the storage of Russian cathode on exchanges is seeing this material flow to China, with more material expected to arrive in early November.

Operational and community-related challenges continue to impact supply. This follows a mine disruption rate of 7.4% in the first half of this year, which was well above the average of 4.9% since 2000.

Major copper producers continue to either downgrade full year guidance or guide towards the lower end of previously stated expectations. Most recently this includes downgrades from Chile’s Codelco, both for the near and medium terms, and Canada’s Teck has lowered 2023 production expectations for its QB2 project in Chile, which is expected to commence production early next year. Other challenges include port closures in Chile, which saw the country’s copper exports down 36% y/y in October, and ongoing community protests in Peru.

We expect copper prices in the current quarter to average close to $3.60 /lb. In the near term, copper prices are expected to reflect a trade-off between weakening near-term fundamentals and the timing of when the market is willing to look beyond this and re-focus on copper’s strong medium- to longer-term outlook.

While global macro headwinds are likely to continue to weigh on sentiment in the coming months, the Fed and other central banks are well progressed in their tightening cycles. At the same time, China’s policies are becoming incrementally positive for demand, exchange stocks remain near multi-year lows, GET related demand is providing an offset to slowdowns elsewhere, and supply challenges continue.

These GET secular demand drivers and supply challenges remain the key drivers of copper’s medium- to longer-term outlook, particularly as global efforts to decarbonise continue to intensify. Adding to this, the current energy crisis triggered by the war in Ukraine is driving an acceleration in the transition to copper intensive renewable energy, which is expected to result in a multi-year bring forward of copper demand for this key growth segment.

For now, low exchange stocks are keeping copper markets in the near-vertical section of its price versus inventory relationship. While this should help to support prices at higher levels than otherwise might be seen under the prevailing circumstances, it also suggests prices are likely to remain highly volatile in both directions as risk appetite and the fundamental outlook evolve over the coming months.