Fitch Solutions expects copper prices to ease on weakening fundamentals

5th January 2022 By: Schalk Burger - Creamer Media Senior Deputy Editor

Credit risk and market research organisation Fitch Solutions retains its bearish outlook for copper prices this year, as fundamentals are expected to weaken in the coming months.

It expects average copper prices to moderate from $9 285/t in 2021 to $9 200/t this year and to $8 700/t in 2023, before further tapering to $8 400/t in 2025.

Positive long-term investor sentiment towards the green metal will continue to place a floor under prices and prevent them from returning to levels seen before 2021, it said on January 4.

"Over the long term to 2030, we forecast the copper market will remain in deficit as consumption continues to outpace supply, driving prices higher amid the green transition."

"For the three- to-six-month outlook, the copper forecast for 2022 has been raised, as prices remain elevated over tight inventories despite having stabilised since reaching historical highs in May, and will start the year from a higher level than we previously expected.

"With spot prices hovering around $9 568/t, down from $10 747/t reached in May, we are slightly bearish towards prices from spot levels for 2022.

"As per our expectations, copper prices have remained elevated despite easing from the highs reached in May, and have largely traded sideways over the fourth quarter of 2021. In fact, high-frequency indicators show that sentiment towards copper has already weakened compared to the first half of 2021.

"In 2022, we expect prices to ease from current levels, but continue to remain elevated."

Fitch Solutions expects the current tightness in global copper inventories to ease slightly in 2022. Stocks on the Shanghai Futures Exchange continue to hover near 12-year lows, which it expects to improve, starting in the first quarter of the year, owing to Chinese smelters increasing production again following cuts in the second half of 2021 as a result of power rationing on the back of China's energy crisis and winter.

"Global inventories have already started to show signs of loosening, with on-warrant stocks of copper at the London Metal Exchange rising to 81 400 t at the time of writing compared with the 14 200 t seen in October."

Further, idiosyncratic supply issues in Latin America that continue to persist, keeping seaborne concentrate supply tight and preventing global copper mine output from reaching pre-Covid levels, should ease this year.

For instance, in December, Chinese miner MMG was forced to halt operations at its Las Bambas copper mine, in Peru, which accounts for 2% of global copper concentrate production, over prolonged community protests against the project.

Additionally, strike action over wage contracts in Chile over past months resulted in lower production from the Escondida, Cerro Colorado and Andina mines, though these issues have now been resolved.

"Earlier in 2020 and the first half of 2021, waves of Covid-19 infections have also resulted in mine closures. We expect these issues to stabilise in the coming months, while additional mine supply from a number of projects including Anglo American’s Quellaveco mine in Peru will loosen the seaborne market," Fitch Solutions said.

On the demand side, it expects consumption to be stable this year, preventing prices from collapsing to levels seen before 2021.

Chinese apparent consumption of copper declined by 2.8% year-on-year in the first ten months of 2021, registering the strongest decline of 21.6% year-on-year in August 2021.

"However, we forecast Chinese consumption to grow by an average of 1% year-on-year in 2022, as the government is likely to announce stimulus measures to once again support heavy industries and the property sector, amid rising risks to the Chinese economy, that will support base metal demand. Overall, we expect global copper consumption growth to come in at 1.8% year-on-year in 2022 compared to 1.3% year-on-year in 2021."

The company highlighted that green copper demand would likely experience robust growth of 10.5% year-on-year in 2022.

"As decarbonisation goals accelerate, we have quantified the impact of the green transition on copper demand, forecasting green demand to rise from 1.9-million tonnes in 2021 to 2.1-million tonnes in 2022. Over this same interval, green copper demand will also grow its market share of total copper demand from 5.6% to 7.3%, with the majority of demand stemming from renewables capacity additions," Fitch Solutions said.

Over the long term to 2030, Fitch forecasts the copper market will remain in deficit as consumption continues to outpace supply, driving prices higher over the coming years. The main driver of demand growth will be the global transition to a green economy.

"For example, our Autos team forecasts global electric vehicle (EV) sales to reach 15-million by 2030, up from a forecast of 3-million in 2021. According to the Copper Alliance, plug-in hybrid electric vehicles contain about 60 kg of copper metal, and battery electric vehicles about 83 kg.

"This contrasts with conventional automobiles, which contain on average between 8 kg and 22 kg of copper metal. Nevertheless, we expect the market deficit to ease over the coming decade, as rising prices start incentivising new projects and ramp-ups to existing capacity," Fitch Solutions said.

Further, the company warned that risks to its copper price forecasts are high. A faster-than-expected green energy transition would boost demand for copper and place significant upwards pressure on prices. Upside risk to renewables capacity additions and to the accelerated uptake of EVs could see copper consumption growth outpace its current forecasts.

"An accelerated crackdown on copper capacity in China owing to tightening environmental restrictions would cause traditional primary smelter capacity, using concentrates, to be taken offline faster than it is being replaced by modern secondary smelter capacity, using copper scrap. This would result in a significant reduction in overall supply, prompting strong upwards price pressure."

Additionally, a new wave of operational disruptions owing to a Covid-19 resurgence in key Latin American copper producers would constrain supply and interrupt the recovery of supply in Chile and Peru. This sharp, temporary imbalance in supply and demand, would likely send prices on a significant rally, Fitch Solutions said.

Further, a boost in Chinese stimulus towards heavy industries on the back of a slowing economy and resurgence of Covid-19 variants would lead to a sharp rise in Chinese copper consumption, tightening the market and leading to rallying prices.

However, downside risks, including a further strengthening of the dollar, could pressurise copper prices below its current expectations, pushing the 2021/22 average lower than forecast.

"Further regulation by the Chinese government to reduce commodity prices could hamper sentiment and drive copper prices further below our current forecasts," it said.