The Price of Copper: Between Speculative Rallies and Market Realism

The price of copper, known as ‘the doctor of economics’ for its ability to predict global economic conditions, has recently gone through a period of impressive volatility. After a period of uninterrupted growth, metal prices have undergone an abrupt correction, leading investors to confront the harsh realities of supply and demand.

This article will explore the events that led the price of copper to new highs, the reasons for its subsequent decline, and the future prospects for this crucial metal.

 

The Rise and Fall of the Copper Price

A New Historic High and Subsequent Correction

At the end of May, copper prices reached a new all-time high, buoyed by an inventory squeeze that fuelled a speculative rally. Copper prices on the Chicago Mercantile Exchange (CME) rose 38% from their mid-February lows to peak at the end of May.

However, this rise was followed by a rapid correction, leading to an overall loss of May’s gains in the first half of June. By mid-June, the price of copper was down 12.46% from its high almost a month earlier.

Speculative Frenzy and the Realistic Market

Industry experts, such as Commodity Evolution’s research department, had warned that the uptrend seemed unsustainable and destined for a correction. Although speculation had pushed prices up, real demand was not yet ready to sustain these levels.

In mid-June, data from the CME and the London Metal Exchange (LME) showed that investment funds had begun withdrawing their long positions as early as the end of May, suggesting growing uncertainty among investors.

Weak Demand and Warning Signs

Despite rising prices for much of the second quarter, there were constant demand-related warning signs. In China, the seasonal replenishment of copper stocks after the Lunar New Year reached the highest level since 2020.

Meanwhile, the Yanshan copper premium, an indicator of Chinese demand conditions, plummeted, signalling that high prices had discouraged buyers. On the LME, copper prices also showed significant contango, indicating a well-supplied market rather than robust demand.

The Role of China and the Global Market

The Differences between Western and Eastern Markets

While copper prices on the CME suggested stronger demand conditions, the global market was influenced by different factors. US demand, although relatively robust, was not sufficient to offset global supply.

Arbitrage between LME and CME prices relative to Shanghai Futures Exchange (SHFE) prices began to shift trade flows to western exchanges. Moreover, the supply of copper in China almost doubled from April to May, indicating an increase in global stocks.

Reconstituting Stocks and Soaring Prices

In mid-June, LME inventories reached their highest level since February 2024, suggesting an ongoing replenishment. This increase in stocks helped dampen copper prices, which continued to look for a new bottom. Prospects for a sustained rally seemed unlikely without a significant recovery in demand.

The Long-Term Perspective: The Supply Deficit

The Supply and Demand Projections

Despite the recent price correction, the long-term outlook for copper remains bullish. Global energy transition efforts, such as the adoption of electric vehicles and the expansion of renewable energy, will require significant quantities of copper.

However, current supply is insufficient to meet this growing demand.

The Energy Transition Challenge

Recent studies, such as that of the University of Michigan, have shown that the copper production required to support the global energy transition is unrealistic. According to Adam Simon, professor of earth and environmental studies, “the amount of copper needed is impossible for mining companies to produce.”

This underlines the need for new sources of supply and a potential price increase in the future.

The Future of Copper Prices

Electric Vehicle Demand and Supply Challenges

The transition to electric vehicles represents a significant part of future copper demand. However, the need for new mines to meet this demand may not be feasible in the foreseeable future. The promotion of hybrid electric vehicles could help mitigate supply constraints, as they require less copper than fully electric vehicles.

Prospects for the Copper Market

Despite the recent correction, the copper market remains promising in the long term. Investors will continue to closely monitor supply and demand, ready to capitalise on any upside opportunities. When demand finally picks up, copper prices could see a new rally.

In conclusion, the copper market is going through a transition phase, with a precarious balance between supply and demand. While recent volatility has highlighted the short-term challenges, the long-term outlook remains favourable due to global energy transition efforts.

Investors will have to continue to navigate a complex landscape, balancing long-term optimism with current market realities.

Meanwhile, the 3-month LME copper price stands at $9,813/mt, up 1% from yesterday’s close.