Research agency Fitch Solutions has revised upwards its average copper price forecast for this year to $7 250/t, from $6 800/t previously, as prices have pushed higher than previously expected.
The combination of bullish sentiment towards the economic recovery and a substantially weaker dollar have buoyed copper prices to a 2021 peak of $9 412/t and a year-to-date average of $8 432/t.
To put this in perspective, prices have not been this elevated since the beginning of the prior decade in 2011 and 2012.
“Although we were already positive on prices in the first quarter, the rally has been stronger than we expected.
“However, we note that prices have edged lower since their late February high. Bullish underlying factors for copper have started to fade and we see this continuing into 2021. We therefore see prices trending lower from current levels on a six-to-nine-month horizon. We note our 2021 average price forecast is below consensus compiled by both Bloomberg and Focus Economics,” Fitch Solutions says.
Key bullish indicators include investors’ net speculative position, the dollar’s relative value and copper inventories showing signs of trend reversal, which Fitch Solutions expects will play against the copper price rally.
Starting with the combined net speculative position among investors on metal exchanges, Fitch has seen a 29.9% year-on-year decline in the number of net long positions since February.
While still at a multiyear bullish level, the massive decline points to a significant shift among traders’ expectations for copper prices on the year.
The depreciation of the dollar since early 2020 that helped catapult copper prices to multiyear highs has stabilised in recent weeks and Fitch’s Country Risk team has shifted to a neutral stance on the dollar’s outlook in the short term.
The team’s expectation for sideways and potentially higher-value trading over the coming weeks will continue to erode copper’s rally in the near term.
A continued weekly rise in known copper inventories on the Comex, London Metal Exchange and Shanghai Futures Exchange will weaken copper’s price position further if not offset by stock declines in China’s bonded warehouses.
Combined inventories at these exchange warehouses have risen by 24% since the end of February and 70.9% since the end of January to date. Despite the combined level starting from a multiyear low in January and lunar new year causing a seasonal uptick in inventory levels, this rise is nonetheless significant and should not be discounted.
Fitch Solutions continues that, when combined with stocks in China’s bonded warehouses, total inventories as of the end of February have risen to levels not seen since April 2020.
"Should the upcoming bonded warehouse March data release show a further increase in copper inventories, we will see this as a significant bearish trend which will weigh on copper prices.
“We are maintaining our view for copper consumption in China to moderate as government expenditures return to historical norms. The decline from peak copper consumption trend has already materialised in the data with monthly apparent copper consumption adjusted for known stock changes falling by 6.5% between the high in June to December 2020.
“Copper consumption through February 2021 has since dipped by over 30% owing to the seasonal weakness caused by the lunar new year shutdowns. We expect apparent copper consumption will show a rebound in the coming months as effects of implemented fiscal stimulus continue to feed through.”
However, Fitch Solutions adds, the monthly amount of copper consumption is likely to continue falling from pre-lunar-new-year levels.
Lastly, there is a significant supply of copper expected to come on line over the coming quarters and next year which the agency believes will relieve some of the tightness in the market.
“We expect this dynamic to be the primary driver underpinning a decline in copper prices this year. We forecast the combination of both low base effects following shutdowns last year and new mining projects coming on line to lift copper mining output by 7.8% year-on-year in 2021.
“Production growth is slated to come from a wide variety of countries including the US, Peru, Panama, the Democratic Republic of Congo and Indonesia. Increased copper mining concentrate will feed into higher refined output, alongside a general recovery in refined copper production in countries outside of China,” Fitch Solutions states.
For example, the US saw a 12.1% reduction in refined copper output over 2020 and Fitch Solutions forecasts a 10% recovery in copper output over 2021. Overall, it forecasts that global refined copper production will grow by 3.9% this year following below-average growth of 1% in 2020.
While the agency holds a bearish outlook from spot levels, it expects copper prices to still average higher in 2021 relative to the past seven years as the global economic recovery supports demand and maintains the copper market deficit.
Copper consumers outside of China, such as the US, Germany and Japan, saw copper consumption decline significantly resulting from the slowdown in economic activity in 2020.
“Over 2021, we do expect a broad rebound in copper consumption as economic activity recovers which will broadly bolster copper demand at the global level. We forecast global copper consumption to grow by 2.9% in 2021 following an estimated 2.6% growth in 2020,” Fitch Solutions notes.
LONGER TERM
Fitch predicts that, over the longer term to 2030, the copper market will remain in a market deficit, as consumption growth remains strong, driving prices higher.
The uptick in consumption will be led by copper's main end-use sectors of autos, infrastructure and power. For example, Fitch Solutions’ automotive team forecasts global vehicle production growth to reach 7.4% year-on-year this year, then average 2.7% year-on-year over 2022 to 2026, driven by increasing vehicle production in China, the US and Germany.
“Overall, we now forecast average global copper consumption growth of 1.8% over 2021 to 2030.
“We expect China will retain its position as the top driver of consumption growth over our forecast period, constituting more than half of global consumption, as the country's expanding power and construction sectors will offer further support to copper demand.”