Our Copper MMI held steady at 61 points in October. At first glance, it might appear that there is nothing bullish about that. Markets remain in surplus due to producers’ unwillingness to cut capacity.
Copper prices have lagged the rest of the industrial metals this year and we’ve been pretty bearish on copper since 2011. But, although still early to make a call, there might be a bull lurking in the shadows. Copper prices might be setting up for a big run.
Although prices didn’t rise in October, they showed resilience in the face of a rising dollar. Moreover, base metals continued to hit new highs. Even aluminum, a metal that has lagged this year, recently hit a 15-month high. With this bullish sentiment in the metal complex, it wouldn’t be surprising to see bulls going after copper sooner than later.
China makes up nearly half of the world’s copper demand. Chinese demand from infrastructure and construction has been robust this year and the release of new manufacturing PMI data confirmed strong demand. The Caixin manufacturing PMI for October rose to 51.2, the highest reading since July 2014 and betting market expectations.
Surplus Now But Future Deficit
Copper is a very slow business in terms of new project development. Lead times can be more than a decade for new copper mines. Projects that started during the boom years have still been coming online, keeping markets oversupplied.
However, current copper prices are way below incentive prices for new investments. Over the past 2-3, years miners haven’t committed to new developments. Consequently, even if prices rose to levels high enough to incentive new developments, it will take a long time for that new supply to hit the market.
The combination of robust demand and the long time needed for new copper projects to move from inception to production, is creating perfect conditions for a price squeeze. And, given the current appeal of the industrial metals complex, investors could buy into this story right now. It might be too early to make predictions but we could see prices comfortably trading above $5,000/metric ton any time soon.