Special feature by Kristie Batten
There’s a renewed groundswell of optimism emerging around everyone’s favourite red metal, copper.
The People’s Bank of China’s last week announced a surprise 50 basis point cut to the reserve requirement ratio (RRR), while there are high hopes of further stimulus measures to come from Beijing.
The news sparked a rally in base metals, including copper. Copper is now sitting at a 2024 high of just under US$8500 per tonne, or $3.85 per pound.
Analysts from Citi said it remained unclear whether last week’s cut signalled further actions would closely follow, but it had become more obvious that the growth trajectory was highly policy dependent.
“We believe that upside risk to demand this year is more tied to fiscal/quasi-fiscal stimulus, although this requires more accommodative monetary policies,” the bank said.
Meanwhile, Goldman Sachs says the fundamentals for copper are strengthening.
“In our view, copper already has exceptional fundamentals that are not directly dependent on a Chinese RRR cut,” it said on Friday.
“That said, this adjustment in policy can help boost sentiment and support credit extension as noted by our economists, which we think should in turn reduce the left tail risks to China’s traditional copper demand (property, appliances, machinery).”
Tailwind for copper
Both banks also pointed to a sharp decline in treatment and refining charges (TC/RCs) as a further tailwind for copper.
On the supply and demand front, the latest figures from the International Copper Study Group indicate that the global copper market was in a preliminary apparent deficit of 130,000 tonnes in the first 11 months of 2023. Full-year results won’t be available until next month.
“The world refined copper balance, adjusted for estimated changes in Chinese bonded stocks, suggested a market deficit of about 152,000t,” it said last week.
RBC Capital Markets says the closure of the large Cobre Panama mine and recent guidance downgrades from Anglo American and other producers has reduced its supply estimates by 700,000t since its last update in October.
“We now anticipate a 223,000t deficit from a 267,000t surplus previously,” the bank said.
RBC said the shortage would become more acute later this decade due to electrification and green technology and a shortage of quality projects.
Goldman Sachs sees a 428,000t deficit in 2024, weighted to the final three quarters of the year.
Sandfire Resources managing director Brendan Harris admitted this week that industry would struggle to meet optimistic supply forecasts.
Where are prices headed
So what does this mean for price?
Citi is not quite as optimistic as others but has lifted its three-month copper price forecast from $8500/t to $8800/t.
“In the short term, copper faces upside risks from recent heightened concerns of concentrate market tightness following a sharp fall in spot TCs,” analysts said.
“The potential for further China easing could prompt copper to revisit this $8800/t level.
“We still see copper prices averaging lower at $8000/t in Q2 and Q3 as focus shifts to our expectation of rising developed market debt service burdens and associated further growth deterioration.”
Goldman Sachs is the most bullish, with a 12-month price target of $10,000/t.
Perennial copper bull, Ivanhoe Mines founder Robert Friedland, told Bloomberg last week that he was forecasting a copper price of $9500/t due to strong demand from China and other parts of the world.
“The physical market is very tight and now in deficit and with the Fed likely to cut rates, the dollar denominated price of copper is likely to go up,” he said.
Longer term, RBC forecasts a price of $4.50/lb ($9918/t) from 2025-2027.
“We have also increased our long-term copper price estimate to $4/lb from $3.50/lb to reflect higher incentive prices given the challenges in building new supply including persistent cost inflation, increased social issues and a scarcity of quality projects.”
