The copper market saw a near doubling in prices over the last year.
Copper fell to an LME low in March 2020 of $4,371 per metric ton. Fast forward to this year, however, and it closed at $8,764 prior to this past weekend.
But anyone following the copper market will know that even that price is off a late February high of over $9,600.
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Copper market ups and downs
So why has the price dropped back so significantly from its high?
Is this just a pause before forging higher, as Citi Bank would have us believe?
In a recent report, Citi said it expects the metal to fetch $10,000 per metric ton “sooner rather than later” on the basis of a tight supply market. Furthermore, Citi forecast a return to over $9,000 over the next three months and to $10,000 between 6-12 months out.
But a Reuters column by Andy Home offers a more cautious analysis. Home suggests the rapid rise last year and into this was the result of an unexpectedly strong rebound in Chinese manufacturing. As a result, that prompted a surge in imports of refined metal.
Strong investor interest and supply chain restocking abetted price rises. Investors bought into the electrification story and demand from strong electric vehicle (EV) sales. They bought into Citi’s supply constraints, with mine supply hampered by ongoing pandemic restrictions and the longer-term narrative of falling grades and lack of new mine investment.
Copper market bull narrative
As often occurs with investor bull stories, this one had several elements of truth.
The story, however, was equally overblown in the process.
Mine supply has proved adequate. In hindsight, the surge in refined copper imports last year, up by 1.1 million tons to a record 4.7 million tons, has since eased.
November’s relaxation of scrap imports has allowed some of that physical demand to be met by more cost-efficient scrap metal supplies.
Import regulations are still tight. Only the highest grades of copper scrap are permitted. Nevertheless, imports have surged this quarter up from an average of 76,000 tons per month prior to the November rule change to 103,000 tons per month in January and February.
As the wrinkles get ironed out of the changes, scrap imports will continue to rise this year. As a result, refined metal imports will decline.
High-grade scrap supply is also not likely to be a major hurdle, Reuters explains, saying Malaysia has become a significant refining hub for lower-grade scrap destined for China. The US is exporting more copper scrap to Malaysia now than it is directly to China.
China’s relaxation of copper scrap imports has created a significant — some may say seismic shift — in the copper market. That shift has taken the heat out of the refined metal market and supercharged the scrap market.
Current higher LME prices will generate more scrap and, given 6-12 months, improve scrap supply. As such, there is not much ground for copper price weakness in a globally recovering market. However, there is also less probability of a supercycle bull story taking hold again.
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