Will copper’s revival last? China is the X-factor
Last year’s hefty loss for copper has given way to an impressive start in 2019, with tight supplies and expectations of strong demand pumping up prices.
Some analysts see further gains ahead. Others warn that copper’s path isn’t clearly bullish, given its close ties to demand from China, its biggest consumer.
After plunging 20% in 2018, copper futures rose 5.8% in January — the largest monthly advance since December 2017. This week, the futures HGK9, +1.71% settled at a seven-month high above $2.95 a pound, lifting their year-to-date gain to 11%.
“We could witness enormous growth in what I believe is the ‘metal of the future’, thanks to [copper’s] exceptional [electrical] conductivity and the lack of competitively priced alternative metal,” said Frank Holmes, chief executive at U.S. Global Investors. Holmes expects copper to rise on increased demand for renewable energy and electric vehicles and a “looming supply gap.” Electric vehicles consume three to four times as much of the metal as those powered by traditional internal-combustion engines, he says.
In a report issued in October, the International Copper Study Group, an intergovernmental organization of producing and consuming states, projected a global supply deficit of 65,000 metric tons in 2019. Refined usage was expected to rise 2.6%, to 24.89 million metric tons this year. China imported 479,000 metric tons in January, the second-highest total on record, said Holmes, who expects consumption to “rise even more as the country transitions to electric vehicles.”
He notes that futures prices stand significantly below their record $4.629 settlement, hit on Feb. 14, 2011. Morgan Stanley recently forecast a 14% rise in spot prices for copper, to $3.12 a pound, by year end. Holmes finds that prediction “compelling.” He believes that 2019 “could be not only copper’s year, but also copper miners’ year.”
Given that, one of the best ways to participate in the market is with “exposure to high-quality, well-managed copper miners, as well as funds that have a large position in copper mining,” the analyst said. He mentioned Freeport-McMoRan Copper & Gold FCX, +1.54% and Rio Tinto RIO, +1.40% as among the miners recently upgraded by some big banks.
Holmes views the U.S.-China trade dispute as a “short-term nuisance” that shouldn’t “have much of an impact on copper’s role in the long-term trend toward electrification, which will continue to gain momentum in the years to come, thanks to pollution-preventive measures.”
But John Caruso, senior market strategist at RJO Futures, said “hopes of a U.S.-China trade deal have largely been behind the ambitious rally in asset prices” this year. Without a deal, traders expect Chinese copper demand to fall. And he adds: “Ultimately, copper will follow Chinese demand, which we’re not expecting to be a bullish catalyst this year.”
“Our outlook for U.S. and Chinese growth figures are still very much suggesting that both economies are slowing,” he said. He notes that recent Chinese factory inflation data came in weaker than expected and there was a “massive inflow” of 64,000 metric tons to Shanghai copper stocks in a week. In the U.S., some economic data “painted a fairly grim picture,” with retail sales down a preliminary 1.2% in December.
So, Caruso concluded, “At the moment, I’d prefer to trade copper with bearish bias until the technicals and fundamentals improve.”