A rise in the price of copper is likely to continue in 2021 on low inventories and a bullish demand narrative, though at a slower pace, industry analysts said.
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The red metal has found support on the back of upcoming elections and labor negotiations in Chile and Peru, an anticipated rebound of the global economy, sustained growth of industrial activity as well as robust metal demand by China, global COVID-19 vaccination rollout, and a weaker dollar.
"This provides a lot of confidence," said ABN AMRO Group senior economist Industrial Metals Markets Casper Burgering.
"As a result, total long positions are high, but this also brings a downside price risk because it increases the likelihood of profit-taking by speculators. In 2020, the market has taken a substantial advance on the good news of 2021. The copper price will rise further in 2021, but in a lower gear."
The coronavirus pandemic's impact on the global supply chain and logistics have resulted in year-on-year supply of the metal from Chile and Peru to tighten, said Global Commodity Research analysts at Bank of America.
"While we have factored in an increase of mine production and also scrap supply this year, this is unlikely to be sufficient to prevent the copper market flipping into a deficit," Bank of America said.
"We lift price forecasts especially for copper, which we see averaging $9,500/mt ($4.31/lb) in 4Q21, with the market likely flipping into a deficit, as inventories are low."
Canaccord Genuity mining analysts expect Chinese stimulus to support copper demand in combination with an expected global economic recovery in 2021.
"We now expect copper prices to average $3.50/lb ($7716/mt) in 2021, an approximate 17% increase on our previous forecast of $3.00/lb ($6,614/mt)," Canaccord said.
In terms of copper supply, two aspects that are also hindering supply are the lower grade and deeper deposits as well as market appetite and availability of projects, Stifel Financial analysts said.
"Due to the cyclicality of the copper market, we have looked across the sector at mega projects currently board greenlighted to get a sense of downside price protection for the red metal. With a copper market in excess of 22 million mt Cu annually, only major projects (we define as those greater than 200,000 mt/year Cu produced) have the ability to materially swing the needle on the supply/demand balance," Stifel said.
"Based in part on capital costs, operating costs, and a minimum acceptable return on investment, we estimate that current major projects require a minimum price in excess of $3.20/lb ($7,055/mt) Cu, globally."
The expected increase in copper demand is also a result of the sustainable energy generation and consumption agenda, part of the green energy drive by governments.
"Of all the metals used in the generation, transmission, storage, and consumption, copper remains the common denominator," Stifel said. "Electricity generation, transmission infrastructure, energy storage, and consumption all require copper."
Copper's long-term demand is backstopped by green energy and the push toward it, "as it is significantly more copper intensive than traditional, fossil fuel-based infrastructure," Stifel said. "We are updating our LT [long-term] Cu price to $3.40/lb ($7,496/mt). We believe a combination of short- and long-term market support in pricing."
This was echoed by Bank of America. "Given the increased focus on tackling climate change, the focus of government spending will be worth following as de-carbonization is bullish metals."
"Linked to that, we believe copper could once again rise above $10,000/mt ($4.54/lb) at some stage. What are the risks? Vaccine efficacy, delays to opening up economies and tighter monetary policy."
On Jan. 18, the copper price stood at $8,012/mt ($3.63/lb), up 0.7% on Jan. 11, with the metal experiencing "volatile trending, down last week on a firmer dollar and as China's renewed COVID-19 concerns offset prospect of US stimulus," South African research house Afriforesight said. "Up today on strong Chinese growth data."
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