While hedge funds have gone soft on copper, the metal continues to trade within striking distance of all-time highs.
But whether this is as good as it gets or just the beginning of a supercycle for the bellwether metal is far from settled.
The uberbull camp 鈥� led by Goldman Sachs 鈥� has seen its ranks grow and the predictions of inveterate contrarians like Goehring & Rozencwajg Associates of $30,000 copper no longer seem outlandish.听
Copper and mining鈥檚 central role in the green energy transition has been well documented and as BMO鈥檚 Colin Hamilton put it with exquisite understatement in a recent report:
鈥淐opper has rarely been a market short in confidence about future fundamentals.鈥澛�
With the demand picture going from rosy to crimson, the bulls have seized upon long-standing issues around copper supply to buttress their arguments.听
Falling ore grades (G&R has a convincing argument that porphyries, responsible for 80% of global supply, are nearing a reserves cliff), decades of underinvestment in exploration and development, and the vexing role of scrap have underpinned price expectations for a long time.
Voodoo Chile, Perumania,聽copperbelt tightening
To these factors, add the spectre of an unfavourable investment environment 鈥� to put it mildly 鈥� in Chile under a new constitution and left-leaning government.听Goldman says some 1 million tonnes of future supply from the country could be in danger.听
In Peru, the lurch leftward could make Chile鈥檚 proposed 75% royalty rates at today鈥檚 copper price look market friendly. If the frontrunner in presidential elections promises not to nationalize mines but would rather negotiate, you know how far the goalposts have shifted.听
The Democratic Republic of Congo (DRC) has gone from 96,000 tonnes in 2007 to 1.3 million tonnes last year, and thanks to Ivanhoe and Zijin鈥檚 Kamoa-Kakula and greenfields like Deziwa, will soon overtake China as the no. 3 producer (that is if you don鈥檛 consider the DRC a de-facto mining province of China).听聽
Inspired by Indonesia鈥檚 success with raw nickel bans, the central African nation reinstated its concentrate export waiver system, creating another choke point in an already tight global supply chain.听
Zambia, closing in on 1mtpa, cannot be far behind.
Crude but effective 聽聽聽
Imagine if these resource nationalism developments in copper were happening in global oil markets; where would crude be trading now?聽
It鈥檚 worth repeating that Chile is not the Saudi Arabia of copper, it鈥檚 the Saudi-Iran-Iraq-Emirates of copper.听 And Peru the Russia. And Congo, Nigeria and Angola combined.听
And it鈥檚 not as if oil workers in Saudi Arabia are wont to strike or local communities regularly blockade oilfields in Russia or that offshore rigs can be swarmed by artisanal聽 diggers.听聽
(And just to draw that analogy out a bit further, the irony of course is that copper is the metal that鈥檒l rid us of fossil fuels.)
All of which makes a purported White House policy of relying on other countries to supply metals to the US because 鈥�it鈥檚 not that hard to dig a hole. What鈥檚 hard is getting that stuff out and getting it to processing facilities,鈥� seem particularly short-sighted.
But that鈥檚 a story for another day, perhaps for 2022 or 2024.
Froth flotation 聽
Roskill attempted to answer the question 鈥榠s copper entering a new supercycle?鈥� with a last week.
Neal Brewster, chief economist at the fast-growing metals and chemicals research firm headquartered in London, presented a graph that puts copper鈥檚 current rally in perspective. A 120-year long perspective.听聽
The chart not only shows some correlation between copper and oil prices and with it broader inflation, but also with nationalization and privatization trends for natural resource assets through the decades.
Bears鈥� most convincing argument that the copper market is already too frothy, is a slowdown in China as Beijing withdraws post-pandemic stimulus and steers its economy away from breakneck fixed investment-led growth in copper intensive sectors like the electrical grid, housing and transport.听
Even in a similar scenario to the one that terminated the most recent supercycle where weakening Chinese demand conspired with an investment surge in new supply, the graph suggests the rally may have legs for a few years yet.听聽
And on top of that in real terms copper has traded higher than today during at least five periods.听聽聽
Click on chart for full size image