Is Copper Setting The Stage For Another 20% Price Rally?

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Copper prices had a spectacular run back in November. So spectacular than no one expected it but us. Ever since, most analysts have questioned the sustainability of this copper rally. Their argument: prices have run ahead of fundamentals.

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I have a different opinion on this. The fact that copper prices have held well after such a run is a sign of strength. It suggests that investors are holding onto copper despite the gains. The profit-taking over the past two months was very constructive and now that prices have rested, it seems like investors are just waiting for some new information before sending prices to the roof again.

3-Month LME copper price. Source: MetalMiner analysis of Fastmarkets.com data.

Other than copper’s price action, there are many reasons to believe another price rally might be around the corner.

The base metals are looking more bullish as we move into February and strong Chinese data is no doubt driving that. President Donald Trump recently signed executive orders to continue progress on two key energy pipelines, making good on his campaign pledge to rebuild the nation’s infrastructure. In addition, energy prices continue to remain supported with crude oil persistently trading above $50 per barrel.

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Even though copper markets are still in surplus, investors know that copper is a very slow business in terms of new project development. Consequently, even if prices continue to rise enough to incentivize new developments, it will take a long time for that new supply to hit the market. The International Copper Study Group (ICSG) is forecasting zero growth in mine supply this year.

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Supply concerns have recently risen due to a potential strike in the giant Escondida copper mine in Chile. This is the world’s largest copper mine, supplying 5% of the world’s copper production. According to a Telegraph article, disruptions of this size and scale can affect copper prices. Moreover, it may set the stage “for wage negotiations across the industry that could lift costs for copper miners,” according to the paper.

What This Means For Metal Buyers

Copper prices might look expensive compared to what they were just three months ago. However, that rally might just be the beginning of a bigger move. Sentiment in the industrial metal complex remains quite bullish and there are factors currently playing out that could build the case for another rally in copper prices. Copper buyers should minimize their commodity price risk exposure accordingly.

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