Copper prices are ruling at a two-year high on hopes of demand for energy transition, electric vehicles (EVs), data centres infrastructure amidst tight supplies.  

But prices could head lower on higher inventories and a sluggish property market in China, analysts say. On Friday, the three-month copper contract on the London Metal Exchange was quoted at $10,420.77 a tonne. 

According to Chilean Copper Commission (Cochilco), copper will likely face a supply deficit of 3,64,000 tonnes compared to demand for this year. On Thursday, Cochilco said it raised its forecast for copper prices to $4.30 a pound from $3.85 earlier.  “Although the high price of copper discourages manufacturers from stocking up inventory, demand remains strong,” it said in a report. Stoppage of Panama’s First Quantum copper mine, besides lower production expectations in Chile and Peru have given rise to fears that supplies could be short this year. 

Price forecast

 Last month, research agency BMI, a unit of Fitch Solutions, raised its 2024 average annual copper price forecast from $8,800/tonne to $9,200/tonne, on the back of tighter supply outlook and a decline in US dollar strength.  “While we anticipate that hopes of a Chinese demand turnaround, stemming from a recovering manufacturing sector, are likely to fuel price growth, we note that the property market downturn will be a major drag, placing a cap on prices and tilting the balance of risks to the downside,” it said.

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The World Bank, in its Commodity Outlook, projected copper prices to increase by 5 per cent in 2024 (year-on-year) and hold relatively steady in 2025 as new production comes online. 

Due for correction

ING Think, the economic and financial analysis wing of Dutch multinational financial services firm ING, said there are indicators which suggest that copper prices are due a downward correction. 

“...the prolonged crisis in China’s property market doesn’t show signs of bottoming out just yet. In particular, housing completions, which usually act as a good measure of copper demand, have been on a downtrend this year, down more than 20 per cent year-on-year, pointing at slowing demand for the red metal,” it said.

High refined copper output in China despite sluggish domestic demand is another concern. “Copper inventories are at seasonally elevated levels as peak season for local demand continues to disappoint. Stocks in the SHFE (Shanghai Futures Exchange) warehouses recently jumped above 3,00,000 tonnes, to a 4-year high, a level last seen when demand collapsed during the Covid pandemic,” ING Think said.  

Supply growth modest

The Australian Office of the Chief Economist said rising consumption of copper from end uses such as grid infrastructure and clean energy power generation are expected to offset moderating demand from sectors such as residential construction and manufacturing.

The World Bank said global demand for copper — a key input for construction and equipment manufacturing — is likely to increase only modestly this year, reflecting subdued global GDP growth and the protracted challenges in China’s real estate sector. 

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“Nonetheless the steady increase in the demand for copper, driven by energy transition technologies — particularly electricity grid infrastructure, EVs, and solar panels — is set to continue. Copper supply growth is expected to be modest this year, limited by production stoppages and declining ore grades in major producers in South America, before picking up in 2025,” it said.  

However, ING Think said the low level of housing starts will continue to weigh on copper demand looking ahead, given the lag between starts and metals usage.

US monetary policy impact

Also, accumulation in stocks has led smelters to export more refined copper to China-bonded zones and LME warehouses. These will likely be exported and despite spot treatment charges slumping below zero last month, there are no signs yet of Chinese smelters cutting operating rates, it said. 

BMI and ING Think said US monetary policy will also be important for the direction of copper prices as higher rates and a strong dollar have proved to be a dampener on the red metal over the past two years. “If US Fed rate cut expectations continue to be pushed back, it should provide a further headwind to copper prices,” ING Think said. But if US rates stay higher for long, it would lead to a stronger dollar and weaker investor sentiment, which in turn would translate to lower copper prices.

Analysts also have their fingers crossed over the US decision to impose higher duties on EVs from China. Europe is reportedly mulling a similar action and this could also drag copper prices.