Near-term volatility but long-term shortage for copper: Macquarie

Macquarie analysts expect a more balanced copper deficit in 2022 after a supply-tight market drove prices to decade highs last year. 

A "sizeable surplus" is expected in both 2023 and 2024, but "should ease by 2025 as mine supply growth slows, with the market returning to deficit in 2026," analysts wrote in a note last Wednesday.

Brace for volatility

Macquarie described the current price environment as extremely volatile and wouldn’t be surprised if prices spiked above US$11,000 a tonne. 

The note flagged several near-term risks that could have major repercussions for the range-bound copper price. Factors to watch include:

• Surging commodity prices could lead to the likelihood of demand destruction as inflation worsens. Increasing pressure from central banks to stop inflation raises the threat of a “policy induced recession” 

• Chinese demand is expected to pick-up as easing policy follows through. China is targeting a GDP growth target of around 5.5% for 2022, accommodative policy should be a positive for copper demand 

• Strong durable goods demand (ex-China) with “no sign yet that consumers are reducing their spending despite real income growth turning negative …”

• Auto industry is beginning to recover and growing electric vehicle market share. Although shortages in palladium and semiconductor chips could stall the recovery 

A looming shortage 

By 2030, Macquarie flagged a theoretical supply gap of 4.6m tonnes as new projects take time to progress study, permitting and construction phases.

Macquarie's copper price forecasts only go as far as the fourth quarter of 2026, where prices are expected to remain relatively unchanged compared to current price levels.

In the near-term, the price forecast expects a possible spike to US$11,000 a tonne in the second or third quarter of 2022, before falling off as supply tight conditions ease.

What does this mean for copper stocks?

Large cap copper stocks like Oz Minerals (ASX: OZL) and Sandfire Resources (ASX: SFR) live and die by spot prices.

Oz Minerals versus Copper Prices, % return since July 2009 (Source: TradingView)

Notwithstanding company-specific project development, a weaker copper price from the second-half of 2022 onwards could be a headwind for local copper stocks.