Copper is experiencing a boom and has reached its highest price since 2018. How can this phenomenon be explained and what is the forecast between now and the end of the year?
At the end of July, Mining.com indicated that copper had become the most profitable commodity in the midst of the current global crisis caused by Covid-19, even above gold(https://www.mining.com/forget-the-gold-price-copper-was-most-profitable-covid-19-trade/). At the time, Mining.com emphasized how stable the Copper price had been during this turbulent year. As the weeks went by that stability became a rebound. The Copper price closed on Friday, August 28, at US$3 per pound, its highest value since June 2018.
What does the future hold?
Forecasts are often uncertain during times like these. Current market conditions are volatile, because the international situation is too changeable. A serious Covid19 resurgence in a key economy, or the discovery of a vaccine, could dramatically alter conditions.
A sensible prediction
The Chilean Copper Commission released its Copper Market Trends Report for the second half of 2020 in early August, based on the current scenario, which contains a forecast of US$ 2.62 per pound on average by the end of the year. Mr. Jorge Cantallopts, Cochilco’s Director of Public Policy Studies, explained “That means that the copper price can be around US$ 2.70 or that range, because recovery in the Chinese economy during the last month has led to a particularly high price together with the impact of other short-term factors, such as the suspension of some mines in Chile, although this risk has been decreasing. The specific production data for July and August in Chile and Peru should help to relax the market.”
Chilean mining indicators have been consistent. Mr. Cantallopts said “Copper production in Chile did not decrease until June, with volumes very similar to forecast volumes. When there was an infection surge in Antofagasta and Calama, the world was very attentive. When potential closures or decreases in production were announced in July, we saw a very significant price increase due to the potential reduction in supply, although this has yet to happen.”
The numbers that Cochilco forecasts are conservative for a reason. Mr. Cantallopts said, “Our role is to provide an unbiased estimate, based on as much information as possible, rather than accurately predicting the copper price. We do not expect to see dramatic price rises, but we provide data that will be used for preparing public policies and several other decisions. Our goal is different, and our forecast at the beginning of August was based on the best information available at that time. Since then we have fortunately seen a rising trend, and today our forecast may seem conservative.”
The Central Bank of Chile also adopts this approach. Its most recent Monetary Policy Report was published last June and forecast a copper price of US$ 2.6 per pound, when conditions for copper were only beginning to improve after instability at the beginning of the year.
Mr. Sebastián Espinoza, XTB Latam’s market analyst explained “The Copper price fully recovered from the fall in March. We believe that it may reach new highs in the short term, but that doesn’t imply that copper prices will rise forever. At the moment there is an appetite for indications of a recovery, and probably the copper price will remain close to US$ 2.7 or 2.8 per pound, but not much more than that.”
US dollar versus copper
The copper price has also risen due to the dollar’s instability. Mr. Cantallopts explained “The slow recovery and poor figures regarding the North American economy have generated liquidity that has kept the copper price high. We have seen a big drop in employment and significant job creation is a long way off, so an expansive monetary policy cannot be reversed.” He added that “as the US economy begins to recover and overcomes the uncertainty produced by the election this year, the dollar should rebound globally, and that could lead to lower commodity prices.”
That uncertainty about the dollar should reach an equilibrium in the coming months. A significant factor is the upcoming presidential election on November 3, which is taking place in a politically polarized environment that has caused economic and social instability.
For now, the rise is sustained, but it seems reasonable to forecast that this trend will stabilize.
Mr. Espinoza added, “Copper had that famous V-shaped recovery everyone was talking about, and it recovered about 28% of its fall in March. US stock market indices are rising and together with the stimulus packages, interest is gathering in investment that has so far helped to keep the copper price rising. We have to remember that productive capacity may still be reactivated, which would lead to a decrease in the price, or at least stabilize it.”
A new equilibrium
The rise in commodity prices should stabilize over the medium term. This is the logical conclusion in the current situation, as supply may still contract, which tends to raise prices. Demand is now on the rise, but it is still below pre-pandemic levels, which should produce a new equilibrium where the copper price remains constant.
Mr. Cantallopts explained, “The Chinese economy should grow by around 1% this year, and that estimate implies that the demand for copper will fall by 3.2% this year. However, supply is also falling around 2.9%, according to our figures, which generates a slight surplus in the market of just over 130,000 tons. Therefore, we think that although the world economy will not grow and will remain close to 5% globally, we believe that the copper price will not fall, and our forecast is not very different from the price we forecast for last year. We have seen a great deal of stability since the beginning of June, with a fairly flat price that has oscillated around US$ 2.9, which should stabilize once the dollar recovers.”