Copper prices saw their biggest quarterly percentage decline in more than a decade and trade at their lowest level since November 2020. But the metal may still have room to fall before its role in renewable energy provides long-term support.
“The present day focus in copper is all about expected demand destruction from recessionary forces,” says John Caruso, senior asset manager at RJO Futures. However, with the recent plunge in prices, “the question turns towards value.”
Copper is seen as an economic bellwether because the metal is used in many applications and products including construction, household appliances, and electric vehicles. Falling prices may indicate a sour outlook as fears mount over a global economic slowdown.
for September delivery on Comex settled at $3.408 a pound on Wednesday, the lowest most-active contract finish since November 2020. They posted a decline of nearly 22% in the second quarter, the largest quarterly percentage loss since the third quarter of 2011.
The disruption in the energy markets due to the war in Ukraine has “reprioritized matters,” away from a focus on copper’s role in greener technologies and climate commitment, as policy makers scramble to have energy needs met, says Bernard Drury, president and chief executive officer of hedge fund and alternative investment firm Drury Capital. “This tempering has mitigated the perceived need for massive new supplies of copper in the years ahead,” contributing to copper’s recent decline.
The copper market is also attuned to the Federal Reserve interest-rate hikes, rising inventories, and the “specter” of recession, says Drury.
Still, the metal had seen strong price increases in both 2020 and 2021, with global supplies of copper “very challenged,” while demand continued to grow, says Matthew Fine, portfolio manager of the Third Avenue Value Strategy portfolios. That, combined with the realization that “renewable energy technology is extremely copper intensive, conspired to push prices upward.”
Recessionary worries have taken hold this year, as “strict lockdowns in China and the potential impact on economic activity by the largest consumer of copper” exacerbate traders’ eagerness to “de-risk,” Fine says, as they avoid exposure to the industrial metal, which could see demand decline. Still, it’s reasonable to see that as a “temporary phenomenon.”
He says he would not emphasize what’s happened over the last couple of years, or in 2022—and instead points out that global copper consumption continues to rise, and has grown by more than 3% a year for the last 120 years, on average. “There is little prospect for supply keeping up with that demand growth over the coming several years,” says Fine.
Copper prices saw an impressive jump in prices from intraday lows just below $2 a pound on Comex in April 2020 to highs above $5 in March of this year. That’s a two-year rally of roughly 150%. While the market has retraced a little more than 50% of that rally, it “may still have some work to do on the downside before we can actually say we’ve established a bottom or ‘value’” in copper, says RJO Futures’ Caruso.
Even so, the market may be “closing in on levels where longer-term investors could see value in price,” he says. Based on technical analysis, he sees $3.17 a pound as a “big level” for copper traders, investors and bargain hunters.
That’s the price where “you could begin to see insatiable demand for the red metal,” says Caruso. “After all, due to its effective conductive properties, copper may soon become the ‘new oil’.”
Goldman Sachs Group
referred to copper as the “new oil” in a research note dated April 13, 2021, emphasizing the metal’s critical role in achieving the Paris climate goals. “Discussions of peak oil demand overlook the fact that without a surge in the use of copper and other key metals, the substitution of renewables for oil will not happen,” analysts at Goldman wrote.
For the near to intermediate term, however, Caruso says he’s not bullish on copper because there’s “still many unanswered questions around what the severity of a potential global recession in coming months.”
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