Copper set to consolidate but remains long-term bullish, Citi says

Copper has had a great run but the biggest one-day price fall in almost two years is as good a sign as any that the surge of the past three months has reached a plateau.

On Wednesday copper fell 4.1 per cent to $US10,419, its biggest one-day fall since July 2022. Picture: Ben Clark

Copper has had a great run but the biggest one-day price fall in almost two years is as good a sign as any that the mini-boom over the past three months has reached a plateau.

Citi now says copper is set to consolidate for the next three to six months as China’s economy is yet to fire up and the surge in copper will tend to rebalance the market for now.

After rising 19 per cent since early October 2023, when it started to take off along with the price of gold, copper surged above its January 2023 peak at $US9550 a tonne in mid-April.

On Monday copper hit a record high of $US11,104.50, as it soared above a previous record of US$10,0845 reached in March 2022.

The commodity known as “Dr Copper” for its ability to predict economic cycles had surged by a staggering 30 per cent year to date, and as much as 37 per cent from its February low.

But on Wednesday copper fell 4.1 per cent to $US10,419, its biggest one-day fall since July 2022.

The sell-off came amid renewed concern about China’s demand.

Based on its latest survey of factories producing about 30 per cent of China’s total fabrication capacity, industry research house Mysteel Global said nearly two-thirds of China’s copper rod producers had cut or stopped production due to slowing sales.

Shanghai Futures Exchange copper inventories hit a record high for this time of year Bloomberg said.

But Citi’s commodities team, which predicted much of the melt-up in copper to fresh record highs in recent months, says investors were “right” to push copper above $US10,500 a tonne.

“We think this rally is justified as without it we would have a much larger deficit this year, and each year going forward,” Citi’s London-based global head of commodities research, Max Layton, said.

“Indeed, the year-to-date rally marks the beginning of copper’s second secular bull market this century, with copper miners set to print massive margins for the next two to three years at least.”

The surge in copper this month comes as BHP attempts to buy copper play Anglo American.

In Citi’s quarterly outlook in March, Mr Layton said copper’s second secular bull market this century was just taking hold, 20 years after China’s urbanisation and industrialisation-led secular bull market.

That bull market was muted by cyclical weakness in the past 18 months.

But after spending 16 months in “contraction” territory, the JPMorgan Global Manufacturing PMI has been signalling a modest expansion in global manufacturing activity since February.

Last month Mr Layton said copper could see “explosive price upside” over the next two to three years too, if a strong cyclical recovery occurs at any time. An upturn in the global manufacturing cycle plus secular demand growth drivers could easily see deficits in supply versus demand.

Energy transition demand alone is driving an uptrend in total copper consumption, while AI and a cyclical upturn in the global manufacturing cycle would be “kickers” that could cause a total deficit of 1 million tonnes over the next three years, requiring higher prices to balance the market.

But after the copper price exceeded his most recent three-month target of US10,500 a tonne, Mr Layton said that will “avoid huge deficits in the copper market this year as the scrap market responds”.

Based on current prices around $US10,500 a tonne he sees a much smaller deficit of 95,000 tonnes in the copper market in 2024. Before the surge in prices he saw a 302,000 tonne deficit.

“These changes primarily reflect greater smelter scrap supply, a delay to Cobre Panama’s modelled restart to mid-2026, upward revisions to cyclical demand growth expectations ex-China, and some further smaller demand adjustments,” Mr Layton said.

But after flagging the boom some months ago, Citi still sees the red metal hitting $US12,000 and possibly even $US15,000 a tonne over the next 12-18 months.

The bank’s mining analysts calculate that $US10,500 a tonne for copper is only at “the lower end of the range of what equity investors are paying into perpetuity for pure-play copper equities”.

The timing and degree of the next leg in the bull market will to some extent depend on the degree of stimulus from China as well as the extent of US interest rate cuts that analysts expect in the second half of 2024 and the current expansion in the global manufacturing sector.

“Deficits are likely to start being felt by around the December quarter and should widen on an annual basis through 2024 and 2025, when the copper concentrate deficit results in lower refined supply growth and tightening balances,” Mr Layton added.