Is copper price peak the start of a years-long ‘super cycle’?

Now that rising copper prices are giving stocks a run for their money, the debate about a new ‘super cycle’ in commodities is reviving. What has been driving copper since the beginning of the year, and is a structural commodity boom awaiting us?

Of all the raw materials that have rallied in recent months, copper appeals most to the imagination. Not just because doctor copper serves as a thermometer for the health of the global economy given the metal’s multiple uses. Copper also plays a crucial role in the green transition and the nascent AI revolution with its enormous energy appetite. Both structural trends should put a turbo on electrification, something for which copper is indispensable until further notice.

On Friday, copper broke the USD 10,000 per tonne mark on the London Metal Exchange (LME) for the first time in two years, bringing the price increase since the start of the year to 17 percent. The red metal is doing much better than shares: the American S&P500 stock index gained 6.5 percent this year. Along with copper, other industrial metals are also on the rise, in addition to raw materials such as oil and gold.

The recovery of the raw materials market, which continued to decline in 2023, is partly a result of growing economic optimism. Global industrial activity rose in March for the first time in a year and a half, an indicator that often heralds more economic growth. Doctor Copper will then be present.

But there is more to it. Copper is a perfect example of a commodity that has been underinvested in for years. Add to that recent struggles at a series of copper mines – the large Cobre Panama mine has been shut down since December – and you get a classic story of growing demand colliding with tight supply. That drives up prices.

The climb once again puts a magnifying glass on the underlying trend in the copper market, says Philippe Gijsels, chief strategist at BNP Paribas Fortis. ‘The fact that this market may be heading for a shortage – 200 additional mines are needed on top of what is under construction – has been somewhat obscured in recent years by weak Chinese economic growth.’ Recent weak demand from China, as an industrial powerhouse and a major consumer of copper, temporarily dampened copper prices.

Now that demand is picking up again – also from the US – a recovery appears to have started, although there are doubts about how sustainable the Chinese recovery is. And whether the financial markets are not too far ahead of the facts. ‘The market is already pricing in an industrial revival, but this has yet to be confirmed. The speculative price rise creates the risk of a pullback,” warns Marcus Garvey, the head of the commodities team at financial group Macquarie.

A trigger for such a pullback could be disappointing economic growth, or built-up copper reserves that are not depleted as expected. ‘The consensus expectation in the copper market is that we are going to a deficit this year, but for the time being it does not seem that way. Normally inventories shrink in the second quarter, but that is not the case today,” says Garvey.

Citibank’s analysts are more reassured. They see the copper price holding steady at an average level of $10,000 in the second and third quarters. Hedge funds expanded their positions on copper earlier this month. Ole Hansen, a commodity strategist at Saxo Bank, talks about a ‘buy the dip’ market, where every price drop is a reason to buy.

Garvey acknowledges that the copper market is facing supply issues in the short term. For example, the closed copper mine in Panama has an annual production of 400,000 tons, approximately 1.5 percent of world production. Moreover, mining group Anglo American caused a cold shower in December by unexpectedly lowering its copper production outlook.

And then there are the recent American and British sanctions against Russia, which means that the LME exchange is no longer allowed to accept Russian copper, aluminum and nickel. That could boost the copper price, because Russian production accounts for 4 percent of the global total. Although Garvey believes that the sanctions will have little impact on supply. All Russian copper can go to China, because that country is not participating in the sanctions.

On the demand side, Garvey sees a structural tailwind for copper thanks to the energy transition, which requires copper for electric cars, wind turbines and the expansion of the electricity grid. But according to Garvey, this does not necessarily have to lead to greater copper demand than before. Rather, he sees a shift in demand.

‘Since the late 1990s, China’s urbanization and industrialization have boosted demand. Now that that process has largely been completed, copper demand in the coming decades will come from the energy transition. This will replace China as the locomotive for the copper market, so that demand will remain more or less stable. Demand has grown by 2.5 percent per year over the past 20 years, and will continue to do so in the coming decades. It’s just that the demand comes from elsewhere,” Garvey said.

Garvey’s analysis immediately undermines the idea of ​​a new commodity supercycle. ‘A super cycle means that commodity prices experience excessive growth over a period of many years. The problem with the energy transition is that it does not mean a boost for all raw materials. The consequences are positive for copper, aluminum and nickel, neutral to negative for zinc, platinum or oil. So you have to differentiate, while the rise of China in the previous decades gave wind to almost all raw materials.’

Gijsels only partly agrees with him. ‘It is true that copper and lithium are different animals. You have to look at them individually. But copper is the raw material that seems most difficult to replace. Moreover, the trend of urbanization is far from over: there is still the rest of Asia and Africa.’ So Gijsels does believe in the super cycle.

He sees copper in particular doubling in price in the coming years. ‘It can also go faster. In the event of a shortage, producers who need copper pay any price. Don’t forget that it takes five to seven years to open a new copper mine, and ten to twelve if you include financing and the increasingly difficult permitting process,” says Gijsels. The stock exchange Goldman Sachs sees the copper price rising to $12,000 within twelve months, driven by an estimated shortage of 428,000 tons this year.

The tension on the copper market is translating into merger and acquisition fever. This week, the mining giant BHP offered more than 36 billion euros for its sector peer Anglo American, an offer that the latter rejected as too low. Anglo American’s copper mines in Chile and Peru are a coveted target. Both companies together would represent a tenth of the world’s copper production.

According to Gijsels, BHP’s move has given the starting signal for further takeover attempts. ‘It puts pressure on other mining groups to think about their future. What is surprising is that BHP’s bid for Anglo immediately links two major players. Typically the big boys start with bids for mid-sized players.” Apparently it can’t go fast enough.