Material Matters: Copper & Iron Ore

Commodities | Jan 19 2024

While the long-term outlook for copper is unchanged, there is potential for near-term downside, while brokers believe long-term fundamentals for iron ore are largely unchanged.

-Longview Economics forecasts near-term copper price downside
-Long-term bullish outlook for copper intact
-Analysts unconcerned by iron ore's recent price fall

 

By Mark Woodruff 

Near-term downside for the copper price

Longview Economics mounts a strong case for selling copper at current prices, on a six-to-nine months view, while maintaining the long-term bullish outlook for copper prices remains intact. The latter view is supported by significant forecast growth for electric vehicles, renewables capacity and power grid transmission.

Over at UBS, it’s felt the copper price is nearing a turning point, but the question of when to buy is left unanswered.

This broker lists several bull points for copper including low visible inventories and a lack of tier 1 exploration success, while new projects are generally in higher-risk jurisdictions where political uncertainties may ultimately weigh.

Longview’s financial model currently signals the copper price is elevated relative to barometers of Chinese activity (i.e. currency, interest rates and equities), while a forecast rally in the US dollar over the coming weeks/months should exert further downward pressure on the red metal.

Additionally, power sector investment growth in China is turning lower, the country’s property sector continues to deflate, and Longview expects global copper supply growth should rebound this year.

China’s credit impulse, which calculates the annual change in new credit (public and private) as a percentage of gross domestic product, serves as a leading indicator for the country’s economic activity.

Unfortunately, various leading indicators point to a weak/falling credit impulse this year, notes Longview, yet Chinese officials remain reticent to reflate the property bubble and are avoiding “flood-like” stimulus.

This weaker credit impulse helps underpin two negative factors for copper: a likely deceleration in Chinese power grid investment growth, and ongoing deflation of the property sector, explains Longview.

Slowing grid investment growth will have multiple knock-on effects for copper demand. By way of example, Longview notes several Chinese new energy executives recently complained about the lack of ultra-high voltage cables causing delays for renewables construction.

The overhang in China’s property sector remains substantial, according to Longview, and will place ongoing downward pressure on copper demand over coming years. A return to typical levels for global copper supply growth is a further nail in the coffin for copper’s price prospects in 2024. 

There was lower-than-usual supply growth in 2023, explains Longview Economics, due to rising costs, strikes and ongoing supply issues across major producers.


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