In a recent Buttonwood column for the Economist, John O'Sullivan laid out a case for retiring the nickname “Dr. Copper” for the ubiquitous red metal. The piece articulates a convincing argument that the relationship between copper and the wider economy, which has traditionally meant the metal’s price serves as a global industrial bellwether, is becoming outdated as the electric transition gathers pace. As we enter the final months of a year which has, thus far, failed to deliver the copper price increases that many were predicting in late 2022, O’Sullivan’s article provides an interesting launching point from which to consider how copper prices might develop next year.
What’s In A Name?
The nickname "Dr. Copper" has traditionally been bestowed upon the metal due to its unique ability to serve as a reliable economic indicator. Copper, an essential component in various industries, including construction and electronics, experiences fluctuations in demand that closely mirror economic health. When economies thrive, there's an increased need for copper, while economic downturns lead to reduced demand. As such, the metal has earned a reputation for "diagnosing" the global economy's well-being. Investors and analysts often turn to copper prices as a barometer of economic growth, making it a trusted doctor of sorts, prescribing insight into the world's financial pulse.
As 2022 drew to a close, there was significant optimism that the economic turbulence of the previous three years would be left in the past. Consequently, many foresaw an upward trajectory for copper prices in 2023. From a quick glance at news from the final quarter of last year, it is easy enough to locate bold predictions from big banks. As CNBC reported in December, Goldman Sachs “hiked its 12-month forecast to $11,000/t from $9,000/t and upgraded its average price forecast to $9,750/t for 2023.” Bank of America meanwhile had a “$10,000 price forecast for the fourth quarter of 2023 — and said that if the right set of circumstances came together, it could hit $12,000/t.” Related: Is This The Moment Of Truth For The EV Industry?
Not all bets were so bullish for this year. Fitch Ratings forecast an average price of $8,000/t for 2023 while BNP were more bearish, setting expectations of “$6,800/t in the first quarter of next year, falling to $6,465/t in the second, but recovering to $8,250/t by the end of 2024.” The scale of difference between these bank forecasts indicates the challenge of predicting these markets, as well as implying the extent to which they are formed by the market agenda’s of the institutions. ChAI’s average copper price forecast for 2023, taken from the same day as the CNBC article, was $8236/t for the year, while prices have thus far averaged nearer the $8,500/t mark.
The bullish expectations for copper this year were based largely on renewed demand from China following the lifting of zero-Covid restrictions, tight global supplies and wider demand to support the green energy transition. While the first month of the year appeared to show this combination pushing copper prices up, January would remain the highest point for the market this year.
Why 2023 Seems Different
While copper prices have not ascended to the heights thought possible 12 months ago, they have nonetheless managed to trade above $7800 throughout the year in spite of a gloomy macroeconomic environment. Global industrial output has been slow this year, with high interest rates capping investment and China’s economy still not back at pre-pandemic levels; this week the country published a manufacturing PMI figure of 49.5, denoting an unexpected slowdown during October. However, as O'Sullivan noted in his Economist piece, copper prices have not fallen by as much as might have typically been expected. He draws comparisons to the 2015 market, when copper plunged by around 25%, whereas in 2023 they are down by less than 10%. Indeed, the slow economic environment of this year was a key reason for BNP Paribas’ bearish prediction for this year. So, why has copper not fallen as far as some expected?
One reason is China’s changing relationship with energy, with the nation’s ambitious renewable energy goals providing a new source of copper demand. O'Sullivan writes that China will install “around 150 gigawatts (gw) of copper-intensive solar-energy capacity this year”, and Beijing has “set a goal of boosting the country's installed capacity of wind and solar power to more than 1,200 GW by 2030”, according to Reuters. This surge in solar development is having a major impact on copper demand, as copper is used in a wide range of solar components, including solar panels, inverters, and wiring. According to the International Copper Study Group, China accounted for over half of the world's copper demand for solar power in 2022. The Chinese government has been supportive of the solar industry, providing subsidies and other incentives to encourage the development of solar power. This has helped to make solar power one of the most cost-competitive forms of energy in China. As a result, solar power is expected to play a major role in China's energy mix in the coming years.
The increasing use of electric vehicles (EVs) is another major factor that is supporting copper prices. EVs use significantly more copper than traditional gasoline-powered vehicles. According to the Copper Development Association, an EV uses about 80 kilograms of copper, compared to just 18 kilograms for a traditional gasoline-powered vehicle, and the global EV market is expected to grow rapidly in the coming years. According to BloombergNEF, global EV sales are expected to reach 38 million by 2030, up from just 6.6 million in 2021. This growth in EV sales will drive significant demand for copper.
A final factor supporting copper prices is that the long-term supply of copper looks unable to support long-term growth in demand due to a number of factors. Copper ore grades have been declining for many years, meaning that miners have to dig up more ore to produce the same amount of copper. Environmental regulations are also making copper mining more difficult and expensive, with many governments requiring miners to reduce their water usage and emissions. Furthermore, social unrest in mining regions is another challenge that copper miners face, as exemplified by the recent referendum over Canadian company First Quantum Minerals’ Cobre Panama mine.
A New Diagnosis
The cumulative effect of these issues means that copper’s current price, or rather its lack of decline this year, increasingly tells us more about the future than it does the present. O’Sullivan concludes that the importance of Dr. Copper’s will be for “policymakers wanting a sense of how their green policies are faring” as opposed to “investors wanting a hint about the state of the global economy.” This transition of copper’s role has not occurred yet, but it is a perspective worth considering as humanity's relationship with commodities evolves alongside the relationship with energy.
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