HT Ganzo
By Sohrab Darabshaw
Hopes of a recovery in copper prices seem to have flat-lined since the start of February. The primary reason for this is lukewarm demand from China, one of the world’s biggest copper consumers.
This effectively ends the price surge markets saw over the past few months, culminating at the end of January. Initially, the optimism over China’s comeback aided copper’s upward momentum.
Now, the market’s attitude has changed from general optimism to one of “watch and wait.” Most analysts simply keep holding out for signs of a resurgent Chinese demand, which many think may not arrive.
Copper Prices Face Pressure from Multiple Sources
According to CME data, copper futures settled at $4.035 per pound on February 6. The metal also hit a new low of $3.9930. This represents the lowest level for copper prices since January 10, when it traded at $3.9875.
Softer-than-anticipated recovery in China remains a big part in copper prices faltering. However, sector experts say there may have been other contributing factors to the price drop.
Among these are a weakness in the manufacturing sector outside China and strikes at copper mines in Peru. Indeed, Peru is one of the largest copper producers in the world but remains in a post-election state of instability.
Adding to price pressures is the fact that copper inventories in SHFE warehouses were up by over 61% to 226,509 tons last weekend compared with January 20. To make matters worse, an upward climb in the dollar continues to make buying copper less attractive for non-dollar holders.
Unrest in Peru, Decline in Chile Affecting Supply
Much of southern Peru, where some of the major copper mines lie, is now under the control of the former President’s supporters. In light of the situation, China-backed MMG Ltd. (OTCPK:MMLTF) has temporarily shut down the Las Bambas mine, ostensibly for “maintenance.” This is highly problematic, as the mine produces about 2% of the global copper supply.
In late January, Glencore’s (OTCPK:GLCNF) Antapaccay copper mine also suspended its operations after protesters attacked the premises for the third time in a month. If social unrest continues, many other mines may have to follow suit.
Moreover, the Peru political crisis will likely affect China’s copper consumption as well. After all, about two-thirds of Peru’s copper output goes to China. If prolonged, these issues could eventually cascade into global supply chain issues.
Also contributing to the copper crisis is Chile. That country is the world’s largest copper producer, accounting for around 27% of the global supply. Unfortunately, Chile posted a year-on-year decline of 7% last November.
Some experts believe that the world may face a copper deficit throughout 2023. Others feel the deficit could even extend for the rest of this decade if efforts are not undertaken to improve the situation. The world is already facing a copper shortage, and the crisis in Peru may only worsen the situation.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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