Copper prices likely to rule firm until June-end

Copper prices, which soared to a record high of $10,845  a tonne a month ago due to low global inventories and the Russia-Ukraine conflict, are likely to rule firm during the current half of this year. 

While some analysts say prices could ease a tad in the second half as supplies are expected to improve, others see copper prices at $12,250 a tonne in the fourth quarter. 

Inventory depletion

 On Thursday, three-month copper contracts were offered at $10,373 a tonne, while the metal sold at $10,350 for cash on the London Metal Exchange (LME). 

Copper prices have been ruling firm since December 2021 as global inventories have been “critically” low. 

US-based Goldman Sachs, which predicts copper to top $12,250 a tonne in the fourth quarter, has predicted that copper is heading for inventory depletion and fundamentals are tightening even as price action remains modest.

US-based research agency Fitch Solutions Country Risk and Industry Research (FSCRIR), a unit of Fitch, has raised its price forecast to $10,000 a tonne for 2022 from $9,200 as the metal market had been boosted by the Russia-Ukraine conflict.  

Long term prospects

“While Russia accounts for just 3.5 per cent of global refined copper exports, critically low global inventories of copper and an existing market deficit leaves the metal highly sensitive to sentiment and external factors,” it said. 

Bank of America has projected copper prices to average at $9,813 per tonne through 2022. But analysts are upbeat about the red metal’s long-term prospects, due to its demand for the greening of the economy, particularly clean energy and electric vehicles. 

According to Zurich-based EFG International Banking services, spare capacity in Chile, China, the EU, and the US will help in the moderation of copper prices. “We expect sentiment towards copper and copper prices both to remain strong in the first half, with some slight weakening in the second half, with a number of factors forming the basis of our prognosis,” Fitch Solutions said. 

Supply shock

Goldman Sachs said the market was facing a supply shock and the current supply situation is not a comfortable one. Its analyst Nicholas Snowdon said there could be 3,74,000 tonnes of refined copper shortage in 2022, double its previous estimate. The shortage will result in inventories depleting. 

“Despite these tightening factors, copper prices have only edged up this year, giving investors a clear entry point to build long position,” Snowdon said. 

Fitch Solutions said LME copper stocks on warrant have averaged 69,900 tonnes compared with 104,900 tonnes in 2021 and 122,000 tonnes in 2020. Copper stocks on warrant on the Shanghai Futures Exchange have averaged 41,600 tonnes year-to-date against 59,800 tonnes in 2021 and 84,600 tonnes in 2020.

‘Frozen conflict’

The research agency said though the Ukraine war had been factored in by the market, its analysts expect the combat between Kremlin and Kyiv to continue in the second half before easing into a de facto “frozen conflict” by the year-end.

“This means that Western sanctions on Russia will persist through 2022,” FSCRIR said, pointing out the April 1 LME ban on deliveries of newly-exported Russian aluminium, copper and lead from its warehouses in the UK. 

ING Think, the financial and economic analysis wing of Dutch Financial Services firm ING, said the LME ban followed the imposition of a 35 per cent tax on these products from Russia. “However, as of 1 April, LME UK warehouses are empty of aluminium and alloys, copper, and lead. Therefore, we think there is no meaningful impact on the metals’ liquidity,” it said. 

Small output increases

Fitch Solutions said copper prices will remain elevated as a result of continued investor doubt over easy access to Russian metals supply following the LME ban. However, a significant escalation in the conflict is required to push copper prices to a new record high.

The research agency expects the current tightness in global copper inventories to ease only slightly in the coming months. “Small increases in output will be driven by Chinese production while Latin American production will continue to lag,” it said.

Copper production in Chile, the world’s largest producer, declined seven per cent year-on-year to 3,94,700 tonnes in February. In January, the output fell  7.5 per cent year-on-year, while there was an overall 1.9 per cent drop in 2021 production.

Silver lining

Chile’s production has been affected due to poor ore quality and drought conditions. since the beginning of the year. 

In addition, Peru, which is the second-largest copper producer, has warned it will target excess profits of mining companies earned from rising metal prices across the globe.  

Ongoing protests at some of the Latin American country’s largest mines have also brought production to a temporary halt.

But the silver lining would be that stocks on the Shanghai Futures Exchange will improve from the current quarter as major Chinese copper smelter Shandong Xiangguang Group has resumed operations after halting production last month. 

Also, China has lifted Covid-19 lockdowns imposed in major producing regions and this will lead to a recovery in smelter output. But there were risks to copper production from fresh lockdowns in view of China’s zero Covid policy, Fitch Solutions said.

Risks to supply

On the other hand, supply issues in Latin America will continue, keeping seaborne concentrate supply tight and preventing global copper mine output from reaching pre-Covid levels, FSCRIR said. 

Though additional mine supply from projects in Peru will aid the seaborne market, there were risks from workers’ strikes and resource nationalism, it said. 

Demand is projected to be stable this year preventing any collapse in prices, particularly with China announcing stimulus packages, FSCRIR said. 

COMMENT NOW