Copper

Why the copper price will rise and the iron ore price will fall

Fri 05 Jul 24, 12:48pm (AEST)
copper yes, iron ore no
Source: Shutterstock, Market Index

Key Points

  • Both copper and iron ore prices saw sharp losses through June, but similarly, each is showing a modest bounce in July
  • The prices of most ASX copper and iron ore stocks have followed a similar path, leaving many Aussie investors uncertain as to what to do next
  • Latest research from Citi suggests there’s more upside for copper, but the outlook for iron ore is potentially far less rosy

Copper was supposed to be the next big thing in 2024 – and for a while there (up to the May peak) it was. Then came June’s correction.

Iron ore, well, that hasn’t been classified as the next big thing since the early-2000s. It's enduring, it just is. Still, the price of iron ore can ebb and flow, taking the prices of our Aussie iron ore miners with it – case in point – the chart below.

Copper, Iron Ore vs Various ASX Copper & Iron Ore Stocks
Copper, Iron Ore vs Various ASX Copper & Iron Ore Stocks in 2024

I have some good news and some bad news for investors in ASX copper and iron ore stocks. The latest research from Citi suggests there’s more upside for copper, but the outlook for iron ore is potentially far less rosy. Let’s investigate the reasons for Citi’s differing views on the two metals.

Why Citi thinks the copper price will rise

Citi believes the recent correction in the copper price is likely temporary, caused by soft global manufacturing sentiment and an unwinding in overly bullish investor positioning.

Figure 4. Investor long position unwind across the base metal complex. Source Citi Research
Figure 4. An investor long position unwind across the base metal complex since the momentum rally faded has driven the retreat in prices from May highs. Source: Citi Research, Bloomberg, LME, CME Group. (From: “Metal Matters Copper set to retest $10k/t near-term on China policy support, fade iron ore strength”, Citi Research. 4 July 2024)

Looking forward, the broker suggests increasing optimism over likely policy stimulus by China and rate cuts in the USA should re-spark upside momentum in the red metal. As a result, Citi sees copper retesting US$10,000/t “in the coming weeks”. The last traded price of copper on the LME was US$9,726/t.

Citi says the key near-term event to watch out for is China’s Third Plenum policy meeting between 15 and 18 July. Note that China holds periodic plenum meetings throughout each of its five-year policy plan periods (the upcoming one is for the third year of the current cycle).

Citi expects further investment in China’s electricity grid will be announced, along with further details on China’s big push into renewable energy – both potentially bullish for copper which is a key ingredient in each pursuit.

Longer term, according to Citi, “both cyclical and decarbonisation related growth drivers ”should help drive the price of copper towards US$12,000/t in 2025”. This means that current prices are a “good buying opportunity for consumers and bullish long-term investors”.

Why Citi thinks the iron ore price will fall

Citi notes that iron ore is likely to be more volatile in the near term, but in the medium term, the broker notes the fundamentals imply “risks are skewed to the downside”.

Reasons for the broker’s bearish view on iron ore include:

  • Chinese steel demand is “muted” due to slowing construction and infrastructure activity

  • Steel inventories are increasing, while port inventories of raw iron ore remain “high”

  • Profit margins at Chinese steel mills “continue to be squeezed”, particularly at current spot prices for iron ore, plus mills are subject to output controls

  • New measures from Beijing aimed at addressing the housing glut

All of the above are “unlikely to stimulate incremental steel demand”, and this means reduced demand for iron ore, says Citi. The broker has a 3-month price target of US$95/t for iron ore, around 16% below the last traded price of US$113/t.

Citi’s ASX copper coverage

We know that Citi is a copper bull, but they clearly don’t see a great deal of opportunity in local copper stocks. The only buy ratings I have on record for the broker are for BHP Group (ASX: BHP), which also has a substantial iron ore exposure, and Evolution Mining (ASX: EVN), which also has a substantial gold exposure. See the table below for Citi’s full ASX copper coverage.

Citi’s ASX copper coverage Table, Source Citi Research (as at 13 June 2024)
Citi’s ASX copper coverage table. Source: Citi Research (as at 13 June 2024) (From: “Australian Copper Equities Pulling forward $12k/t expectations and upgrading estimates”, Citi Research. 13 June 2024)

 

Written By

Carl Capolingua

Content Editor

Carl has over 30-years investing experience, helping investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl has a passion for technical analysis and has taught his unique brand of price-action trend following to thousands of Aussie investors.

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