Critically low copper inventories fail to inspire a rise in spot prices

Copper's extreme supply tightness has created a false sense of security for copper spot prices, which continue to languish around recent lows of US$3.4/lb.

Still, the tight supply narrative has only gathered momentum in recent months, creating a rather concerning disconnect between spot prices.

Buyers want to secure long-term supply

"Copper buyers are so worried about future availability of the metal that they're seeking to secure longer-term deals than normal," according to the world's largest copper miner Codelco, Bloomberg reports.

“We are prepared to continue to strengthen our long-term relations with customers, because we can understand that in their risk matrix, their concern about copper supply is one of their priorities," said Codelco Chairman Maximo Pacheco.

Copper inventories running dry

Commodity consultants CRU Group estimates that global copper stocks currently sit at just 1.6 weeks of consumption, an all-time low in the context of the consultancy's data that goes back to 2001.

Source: CRU Group, Bloomberg

“The physical market is so tight, it’s like a room full of gunpowder — any spark and the whole thing could blow,” said David Lilley, chief executive of hedge fund Drakewood Capital Management Ltd.

Still, the situation is not as easy as low inventories equals higher copper prices.

Source: Kuemmerle Research

Economic growth woes keep prices at bay

"Concerns around slowing economic growth are outweighing supply disruptions and low inventories. Weaker demand in China from lockdowns has dragged into Q3," said ANZ Research in a note last Friday.

"Increased infrastructure spending and policy support for the housing sector should stabilise the market, but the upside looks limited."

Base metal and energy prices were mostly lower overnight in response to China's Xi Jinping cementing his power for an unprecedented third term.

"President Xi’s strengthening of power suggests little reprieve from economic headwinds," noted ANZ senior commodity strategist, Daniel Hynes.

Where does this leave us?

Critically low stockpiles and weak prices just doesn't sound right. But that's been the case for quite some time now.

Copper prices are down around -23% year-to-date but still around 20% higher than pre-pandemic levels.

Still, a 20% rise in spot prices has not been enough to offset ongoing challenges faced by miners, including adverse weather conditions, labour shortages and surging cost inflation.

The headwinds have so far outweighed the tight supply narrative, with:

• 29 Metals (ASX: 29M): Down -37% year-to-date and trading around its July 2021 IPO debut levels

• Sandfire Resources (ASX: SFR): Down -49% year-to-date and excluding pandemic levels, trading at a 12-year low

• Oz Minerals (ASX: OZL): Down -12.4% year-to-date. Share price mostly unchanged in recent months following BHP's takeover offer