London—Copper returned above $10,000/mt on the back of a weak dollar and with China returning to work after a three-day national holiday, with the London Metal Exchange three-month spot copper price trading at $10,117.50/mt ($4.59/lb) at 1749 GMT, some $72.50/mt short of its all-time high of $10,190/mt from February 2011.
Scotiabank analysts said LME three-month copper hit $10,028.50/mt during early May 6 trading, with the red metal dropping to $9,993/mt at 9:00 GMT, before U-turning and climbing above $10,000/mt. Copper rose through $10,000/mt for the first time in 10 years on April 29."This suggests to metals traders that there are sellers emerging from China -- just as they seem to be in the US trading sessions -- and the market is certainly getting a nervous feeling creeping into it," Scotiabank said.
"China just isn't buying copper right now, which makes this recent surge different from what was experienced around 10 years ago. While investors and traders in Europe and the United States have become decidedly bullish on the copper price, the market's top consumer, China, is less optimistic, adding a layer of caution to the metal's red-hot rally and differentiating it from previous bull markets -- including the 'supercycle' of the 2000s," the analysts said.
Scotiabank said while China was taking active measures to cool its economy, including pulling lending away from an overheated housing market, the US had clearly pledged more spending, which included US President Joe Biden's $2.25 trillion infrastructure plan.
In the physical market, Scotiabank said purchasing managers were turning to scrap, while wire and rod producers had noted that orders had declined, which resulted in some shutting down production.
"With China, there seems to be an assumption that demand is inelastic, but that argument is not holding water right now," Scotiabank said.
Supply sideOn the supply side, Chile's Lower House approved on May 6 a royalty bill that would sharply hike taxes on copper mining operations in the country. Chile is the largest copper producer in the world and accounts for about 27% of global mined copper production.
"This will deter foreign investment, in our view, and lead to a higher copper price," analysts at investment bank Jefferies Group said in a note.
StoneX Group's head of metals and bulks fund sales, Michael Cuoco, said: "We have approximately 42% of global copper supply (between Chile and Peru) that is at risk in some way, shape or form. If you want to hurt investment in Chilean assets, whether it's copper, lithium or another natural resource, the tax plans being proposed/discussed are one way to do it!"
Peru is the world's second-largest copper producer, and elections scheduled for June 6 are also causing jitters in the market.
ED&F Man Capital Markets analyst Edward Meir said in a note that copper prices were likely to track higher in the lead-up to the Peruvian elections, where candidate Pedro Castillo was leading his conservative rival Keiko Fujimori.
"Castillo has pledged to give the state more control over the economy, backing such proposals as price controls and higher taxes on mining profits, although he seems to have walked back earlier notions of nationalizing companies (much to the relief of foreign investors)," Meir said.
"His rival, Ms. Fujimori, is dogged by corruption allegations, and although she seems to be gaining some recent momentum in the polls, she still remains about 10 points behind," the analyst added.
Further upside potentialWith copper production down year on year in Chile and Peru in the first two months of the year, along with the upcoming elections in Peru as well as freight markets remaining tight, ED&F's Meir said further upside potential was in the cards, with a $9,580-$10,320/mt trading band for May.
ANZ analysts said the subdued level of growth in supply was expected to keep the copper market tight over the next couple of years, with the bank raising its short-term target to $10,750/mt.
Bank of America commodity strategist Michael Widmer said given the fundamental backdrop and low inventories, copper may potentially reach $13,000/mt ($5.89/lb).
"After the deficits in 2021 and 2022, we expect a rebalancing of the copper market in 2023 and 2024, before renewed shortfalls and another draw on inventories kicks in from 2025," Widmer said.
Taking into consideration depressed growth in supply of the red metal in the near term, Widmer questioned what could rebalance the market in 2023-24.
"In our view, scrap supply is critical, and our analysis suggests that scrap usage at smelters/refiners could increase from around 4,200 mt in 2016 to 6,700 mt by 2025," the analyst said. "If our expectation of increased supply in secondary material, a non-transparent market, did not materialize, inventories could deplete within the next three years, giving rise to even more violent price swings that could take the red metal above $20,000/mt ($9.07/lb)."
