Copper dips beneath $4, suggesting the worldwide economic system is in hassle

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Copper dips beneath , suggesting the worldwide economic system is in hassle
Copper dips beneath , suggesting the worldwide economic system is in hassle

The steel’s upside is shedding momentum, a worrying signal of financial progress

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The copper upside is losing steam, a worrying sign of economic growth and investors who are betting demand linked to the switch to electric cars will offset the glut.

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The price of the metal, used to make everything from electrical wires to roofing, briefly fell below $4 a pound this week, an important psychological threshold.

Copper is considered a barometer of economic health because it is a major input in a wide range of high-cost items such as infrastructure projects and many consumer goods. It even starred in the transition to greener energy, as metal is a critical component of electrification.

Investors in copper and the companies that mine it have had a good COVID-19 crisis, with prices soaring at the start of the pandemic. But copper has been on the decline lately, as rising interest rates and fears of a looming global recession have dampened expectations that demand will hold in the near term.

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The shift in sentiment regarding the economic outlook is now testing expectations that long-term demand for copper will offset the anti-inflationary effect of forecasts forecasting overproduction in 2023 and 2024.

“People thought that demand (for copper) was strong enough to get through that period of surplus without there being a significant drop in copper prices,” said Shane Nagel, an analyst at National Bank Financial. “However clearly the inflationary pressures that we have seen, issues about rate of interest tightening and fears of a world slowdown or some type of recession have put this demand at some danger.”

Now, copper appears to be entering a period of volatility. In March 2020, it started an upward rally, jumping to $4.94 per pound in late February 2022, from $2.17 per pound at the start of the pandemic – an increase of 127 percent. Since it peaked, it’s down 18 percent to about $4 a pound this week.

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This trend is detrimental to the Canadian listed copper producers. Teck Resources Ltd. fell. Vancouver-based 9.2 percent to $40.23 per share on June 23; Ivanhoe Mines Ltd. fell. Vancouver-based 5.4 percent to $7.18; and Hudbay Minerals Inc. The Toronto-based fell 9.2 percent to $5.24.

By comparison, the iShares Core S&P/TSX Capped Composite Index, an exchange-traded fund designed to replicate the broader Canadian stock market, hasn’t changed much.

Electricity demand and stable economic growth are expected to drive copper supply into deficit by mid-decade, which bodes well for copper investors in the long run. The question is what happens every now and then.

Over the next two years, the copper surplus is expected to grow as new mines come into operation. Ivanhoe Mines Ltd. aims to To increase production at the Kamoa mining complex in the Democratic Republic of the Congo, adding up to 450 thousand tons in 2023, and an additional 500 thousand tons in 2024.

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Meanwhile, other mining companies are also close to completing multi-billion dollar projects over the course of years: Teck Resources Ltd. to nearly double its copper production in 2023 as the Quebrada Blanca 2 project in Chile is commissioned, which could add 318,000 tons per year.

“You can start to see the deficit start to form around 2025, 2026,” Nagel said. “So there will probably be a period of volatility, but the market is going to assess some of those favorable long-term fundamentals; it is just a matter of how close or short the market is in the transition.”

Global recession is not the only allowance. Inflationary pressures create tensions between miners and the large union workforce that operates many copper mines, particularly in South America.

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Earlier this week, the Chilean Copper Workers’ Federation declared a national strike after Codelco (Chile’s national copper company) said it would shut down its Ventana smelter. Codelco said it was shutting down the smelter for environmental reasons, but the response from 25 unions shows how rising inflation could exacerbate tensions with workers and threaten future supplies.

Last year, BHP Group Ltd. Hardly has gone on strike with workers at its Escondida mine in Chile, the world’s largest copper mine, amid local media reports that it has agreed to give each union member a one-time bonus of $23,000, in recognition of their time to work during the pandemic.

In 2017, the union itself organized a 44-day strike that led to a 1.3 percent drop in the country’s GDP.

“In this environment, especially with the cost of living rising, you have to think that when they come next time for labor negotiations, (the unions) they might not necessarily be willing to accept some kind of one-time bonus,” Nagel said. “So if these discussions end up becoming more controversial, we could see some supplies withdraw from the market.”

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