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Metal Miner

Metal Miner

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Is a Copper Crisis Coming? Prices Hit New Highs on Smelter Cuts

  • Copper smelter cuts in China due to low processing fees are reducing refined copper supply.
  • Mine closures and protests in Peru and Panama are further limiting copper supply.
  • The falling US dollar and rising copper demand are putting upward pressure on copper prices.
Copper

Via Metal Miner

 

By mid-March, copper prices hit their highest level since April 2023. Prices previously found a bottom in early February before strong upside momentum saw them topple previous peaks within their long-term sideways trend. While prices clocked a moderate1.74% month-over-month decline throughout February, they rose 4.12% during the first two weeks of March.

Overall, the Copper Monthly Metals Index (MMI) remained sideways, with a modest 0.55% decline from February to March.

Copper MMI for March 2024

Copper Ore Shortage Forces Smelter Cuts

Long-awaited supply tightness has begun to come to fruition in the copper market, and Chinese smelters are now starting to ring the alarm bells on ore supply. Much of this stems from plunging treatment and refining charges, now trending near zero, which continue to force smelters in the country to cut production. Miners pay treatment and refining charges to smelters to process their materials. Higher processing fees indicate higher ore supply, while lower fees indicate a tighter market.

Some of the drop stems from smelter overcapacity in China. Back in September 2023, the China Nonferrous Metals Industry Association warned of the risks of an overly expanded sector. In recent years, copper smelting has increased significantly, ahead of expectations of rising global copper demand.

Still, China’s steel and aluminum sectors can continue operating even if forced to dump metal on the global market. However, raw material tightness within the copper market has left smelters struggling to maintain production levels, even as demand for copper rises. 

By early March, this triggered as many as 19 separate companies to agree to cuts via maintenance outages, lower output rates, and delays in new operations. 

Copper Supply Concerns Abound Amid Plunging LME Stocks

While it is certainly part of the problem, Chinese smelter overcapacity is not the only reason for current market conditions. The mining sector faced considerable output constraints over recent years, on top of being plagued by protests, closures, and lower ore grades. 

For instance, Peru’s Las Bambas mine, which accounts for roughly 2% of the global copper supply, faced numerous setbacks due to community blockades. While it currently remains operational, a possible expansion of operations has already drawn the ire of local organizations. This has the potential to trigger renewed protests that could impact the mine’s output.

LME copper inventories and copper prices

Meanwhile, the closure of First Quantum’s Cobre Panama mine remains ongoing. Estimates say the mine represents around 1% of global copper production, and its government-led halt following environmental protests came as a surprise to markets. 

Supply disruptions from mines like Las Bambas and Cobre Panama have left smelters in China needing raw materials, threatening global copper ingot supply. Since late last year, LME copper inventories have started to trend lower. While they remain off their 2023 lows, the trend is nonetheless down. And while inventory levels do not boast a meaningful correlation to prices, they have likely exacerbated concerns over a widening supply deficit projected in the coming years, especially given rising demand.

U.S. Dollar Index Trapped Sideways for Longer

As copper prices search for a new peak, the U.S. dollar index will remain a counterweight to bullish market drivers. A rise in inflation during February threw cold water on hopes that the Fed was nearing a pivot. According to data from the Department of Commerce, the CPI rose from 3.1% in January to 3.2% in February.

While markets await commentary following the Fed’s late March meeting, February’s CPI data suggests inflation remains sticky. As the CPI veered further from the Fed’s 2% target rate, markets adjusted expectations for another delay in rate cuts. The CME’s FedWatch tool showed that within a month, bets of a March rate cut fell from 10% on February 14 to a mere 1% on March 14. Expectations of a cut in May appear similarly low, at just 4.2%. However, the probability rises to 60.1% for June.

Copper correlation analysis

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Source: MetalMiner Insights, Chart & Correlation Analysis Tool 

That said, much could change in the coming months to shift the projections of interest rate traders, and their bets have no bearing on when the Fed will actually move rates. However, the takeaway appears clear: rates will likely remain as is for the foreseeable future.

As it typically does, the U.S. dollar index will follow cues from the Fed. For instance, it has continued to trend sideways in recent months, which means there has been no shift in its influence on inversely trading commodity prices like copper. While this may not be enough to prevent further upside for copper prices, it appears likely to temper those gains until the Fed is satisfied with the state of inflation.

By Nichole Bastin

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Leave a comment
  • George Doolittle on March 18 2024 said:
    Like natural gas copper is well known for incredible amounts of volatility with truly awesome amounts available as refined because of the pure play BEV mania still rolling along. Iron ore prices for example continue to free fall. There is enough refined copper in space to last Earth literally forever if need be if that resource suddenly be able to be tapped. Cmi, Cat, Deere, etc all surging to all time record closing highs year to date for obvious reasons. $ge general electric continues to outperform in spectacular fashion for some time now as well.

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