The global energy crisis is clouding copper as investors who are optimistic about its long-term outlook fear that power shortages and a slowdown in factories could trigger a pullback in the short term.
As a reliable indicator of economic health, copper is fast becoming a canary in the coal mine for analysts and academics, who fear that rising costs for natural gas and electricity will rock markets. That could trigger an outbreak of stagflation, where demand from consumers and manufacturers crumbles, but the costs of goods and raw materials remain stubbornly high.
However, energy is not the only weight of copper, a metal that is essential for builders, automakers and manufacturers of electronic products. The risk of a collapse in China’s real estate sector, mired in debt, plus the ongoing economic threat posed by the delta variant of Covid-19 are driving investors to back off and wait on the sidelines, at least for now.
“In the short term there are some headwinds, mainly due to concerns about the Chinese economy,” said Jay Tatum, portfolio manager at New York-based Valent Asset Management. “But once the world returns to normal growth rates, evenly distributed across the economy, we still believe there are strong arguments for metals like copper.”
Copper’s skyrocketing rally above $ 10,700 a ton came in May as lockdown restrictions sparked insatiable demand for metals in housing and consumer goods. Many merchants and banks bet prices would rise further, theorizing that the manufacturing boom would fit into long-term plans for electric vehicles and renewables.
Bank of America Corp. said $ 20,000 could be possible if major supply-side issues emerged simultaneously.
Instead, copper has fallen to around $ 9,500 as China’s real estate crisis and delta variant rocked the markets. And then came the energy crisis, with economies emerging from the pandemic thirsty for coal, gas and renewables, while supplies dwindled. Citigroup Inc., one of the biggest cheers for copper earlier this year, now warns that prices could fall another 10%, and demand will contract in the next three months.
“What pushed me over the edge in terms of going totally bearish was the power, coal and gas crisis,” said Max Layton, managing director of commodities research at Citigroup in London. “The concern is that it gets a lot worse.”
On Friday, China, the largest consumer, said it will allow 20% increases in energy prices for energy-intensive companies, and most of its provinces are limiting electricity use. Manufacturing activity contracted last month for the first time since the pandemic began.
In Europe, an IHS Markit indicator measuring business activity in manufacturing fell last month by the largest margin since April 2020, the start of the pandemic. New order growth, production and employment slowed considerably after companies such as CF Industries, Yara International ASA and BASF SE said they would cut production because energy was too expensive.
With demand for spot copper still holding up well for now, the default stance among investors appears to be inertia. Speculative positioning in both the London and New York contracts has receded to pre-pandemic levels, although prices are still 50% higher than at the end of 2019.
So far, fears about widespread industrial blackouts have yet to come true. A measure of US manufacturing expanded in September at the fastest rate in four months, with 17 industries reporting growth. Congress is also debating President Joe Biden’s economic agenda that spends more than $ 1 trillion in domestic spending.
For Trafigura Group, the world’s largest copper trader, their confidence in the price outlook remains very high, as strong demand continues and the world falls increasingly short of inventories. And while the risks of an energy crisis hitting manufacturers are increasing, so far there has been a greater impact on copper supply as energy-intensive smelters have regressed.
“Macro headwinds aside, if you look at the speed at which stocks are drawing globally, it is clear that the market is facing significant stress,” said Kostas Bintas, head of copper trading, from Geneva. “It was the microimaging that did us good last time, and it is the microimaging that gives us confidence now.”
David Lilley, who heads metals hedge fund Drakewood Capital Management Ltd., said the tightness in the physical market could help propel copper to another record, possibly by the end of the year. While Lilley is best known as a trader, his company also runs a copper tube business in the US, giving him greater visibility into supply constraints and the strength of end-use demand.
“Hidden in plain sight is the fact that the world is running out of everything,” Lilley said in an interview. “Copper inventory is disappearing everywhere. There are no signs that it will go up. ”
Codelco, the world’s leading copper miner, has yet to see signs that demand from manufacturers is suffering as a result of high energy prices, President Juan Benavides said in an interview. Even so, he warned that the market could not scale new highs in the short term due to the uncertainty about the macroeconomic outlook.
Some traders emphasize that the short-term pain of the energy crisis could be a stimulus in the future if it prompts politicians and companies to invest in renewable energy systems that require large amounts of copper. Most countries have published plans to achieve net zero carbon emissions in the coming decades.
“The market feels more and more like we are loading a spring,” Valent’s Tatum said. “The more we load the spring, the more pronounced the reaction will be.”
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