Don't give up on copper, prices forecast to return to $4: Office of the Chief Economist

The bellwether metal for the global economy is pointing towards a recession, recently logging one of its steepest 10-day declines since the 2008 Global Financial Crisis. 

The rapid deterioration of copper prices seems to suggest that the market has thrown demand and supply factors out of the window, and trying to price in the implications of a slowdown in economic growth and possibly, a recession.

The Australian government’s commodity forecaster, the Office of the Chief Economist (OCE), published its June quarter resources and energy report on Monday.

The OCE forecasts copper prices to average US$4.3/lb in 2022 but fall back to US$4.08/lb by 2024 as surpluses grow. 

China to weigh on growth

Global refined copper consumption rose 4.3% year-on-year in the March quarter, supported by increases in China (3.1%), Taiwan (35%) and Europe (20%). This was partially offset by declines from major copper consumers including the US (-8.1%) and Japan (-11%).

China’s covid lockdowns in the June quarter was the main catalyst behind poor demand for industrial metals, as “several significant industrial hubs faced strict containment measures".

Near-term, copper risks remain towards the downside as the spread of covid and subsequent containment measures in China could weigh on the September quarter and possibly even further, the analysts said.

Assuming China can contain covid, growth in global copper consumption is expected to be positive. 

Downside risks: Inflation, Russia-Ukraine, rates

Outside of China, the report flagged three main near-term risks, including:

• Rising input prices (oil, gas and coal) is expected to flow through to production, which forces manufacturers to either raise prices or cut their output, lowering demand for copper

• Ukraine is a major supplier of wiring harnesses for EU automakers. The cessation of Ukrainian parts has disrupted several automotive supply chains

• Aggressive interest rate hikes could cause a bigger-than-expected impact on GDP, which hurts copper demand

Still positive

Still, the OCE expects copper demand to rise 3.4% in 2023 and 2.8% in 2024 - where total demand consumption is forecast to reach 27m tonnes.

Whereas global mine production is expected to reach around 22m tonnes in 2022.

Copper demand growth is expected to be supported by global trends towards decarbonisation and renewable energy.

Stockpiles on the rise

Copper inventories were drawn down to their lowest levels since 2014 (for the Shanghai Futures Exchange) and 2005 (for the London Metal Exchange).

Total exchange stocks have risen by approximately 60% since the start of 2022, according to OCE, which expects the recent rise of stockpiles to cool prices.

Source: Office of the Chief Economist, Resources and Energy Quarterly (June 2022)

The OCE expects copper prices to average US$9,100 a tonne (US$4.13/lb) in 2023 and US$9,000 (US$4.08/lb) in 2024 but notes potential supply disruptions in Chile and Peru poses upside risks.

The price forecasts suggests that no recession will take place, and expect prices to bounce 10-15% from current levels of US$3.6/lb.