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Copper set to rise on Fed rate cut and demand for key applications

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Copper prices have fallen from a record high of $11,105 a tonne in May but are likely to rebound due to an interest rate cut by the Federal Reserve in the third quarter of 2024 and the red metal’s benefit in key applications such as electric vehicles, wind and solar power, analysts said.

“Copper prices have been trending steadily higher since the start of the year, except in June, hitting an all-time high of $11,105 per tonne on May 20, 2024. Several unique issues have boosted copper prices in the first half of 2024,” said BMI, a research firm part of Fitch Solutions.

Pessimism about the Chinese economy and a weak US dollar caused copper prices to fall to as low as $9,515 in June, according to BMI, but the price has since risen, hitting a high of $9,944 on July 5. Currently, the three-month price of the red metal is $9,915 on the London Metal Exchange, while the cash price is $9,762.

Supply concerns

The Office of the Australian Chief Economist (AOCE) said copper prices have continued to trend upwards in recent months, averaging about $9,700 a tonne in the June quarter, up 14 percent since the start of the year. “The sharp rise in prices reflects solid growth in global demand and is expected to continue broadly into the second half of 2024,” the office said.

Copper prices hit a two-year high in the first quarter, reflecting supply concerns and signs of firming global industrial production, the World Bank said in its Commodity Outlook.

Investors increased their net bullish position in copper for the second consecutive week by 9,156 lots to 85,601 lots in the week ended July 5, the largest net long since May 31, 2024, according to ING Think, the financial and economic analysis division of Dutch multinational financial services company ING, in the latest trader commitment report.

The main reason why copper prices are recovering and analysts are expecting a rebound in prices is the Plenary Meeting of the Chinese Communist Party (CCP) scheduled to be held for four days starting July 15.

Focus on reform

BMI said stock prices recovered somewhat in July on the back of hopes of an economic stimulus package being announced at China’s Third Plenary Session and an increasing number of market participants expecting the Federal Reserve to cut interest rates soon after new economic data supported a rate cut.

AngelOne analyst Saish Sandeep Sawant Desai said the market is eagerly awaiting the third plenary session of the Chinese Communist Party, where economic policies and reforms are expected to be the focus. It is also eyeing upcoming data on China’s renminbi loans and total social financing, which could offer insights into future demand.

Global demand for copper, a key raw material for the construction and equipment manufacturing industries, is likely to grow only slightly this year, reflecting weak global GDP growth and prolonged challenges in China’s real estate sector, the World Bank said.

“Nevertheless, demand for copper will continue to grow steadily, driven by energy transition technologies, particularly power grid infrastructure, EVs and solar panels,” it said.

Demand growth

BMI said expectations of interest rate cuts by the Federal Reserve have led to a weakening of the U.S. dollar relative to highs in 2022 and 2023, helping to boost demand for copper priced in U.S. dollars.

“Second, high-frequency indicators of global economic growth, particularly in the United States, continued to rise better than expected, fostering positive sentiment for copper demand. Third, China’s manufacturing PMI numbers showed a gradual recovery in March and April, boosting speculative holdings. Fourth, major Chinese copper smelters announced production cuts in March,” the report said.

AOCE said China and the United States will account for most of this growth due to increased manufacturing activity and heavy investment in energy infrastructure.

BMI said it expects China’s copper demand to grow 3.5% year-on-year in 2024, compared with 5% in 2023, due to a slowdown in the country’s construction sector, which is crucial to metal prices.

“Our country risk team believes that China’s housing market weakness is likely to continue for several years due to oversupply amid weakening speculative demand,” the firm said. Outside China, growth prospects are muted.

Market deficit

On the supply side, the copper market is expected to enter a supply deficit in 2024 as refined copper production growth slows due to copper concentrate supply constraints, resulting in a tight market. “We expect refined copper production to grow 3.1% year-on-year in 2024, compared to 6.5% growth in 2023,” the research institute said.

Global copper mine production in 2024 will be driven by increased production from new mining projects and a recovery in production from countries that faced operational challenges in 2023. “We expect the closure of First Quantum’s Cobre Panama mine in Panama to pose downside risks to the global copper mining outlook in 2024, while the start-up of production at Russia’s Udocan project and the expansion of the Kamoa-Kakula mine in the Democratic Republic of Congo and the Quebrada Blanca mine in Chile could shift the balance of risks to the upside,” the company said.

The World Bank said copper supply growth is expected to slow this year due to production shutdowns and declining ore grades in major South American producers, but is expected to recover in 2025. It forecasts copper prices to rise 5% this year from last year.

Price Prediction

AOCE said it expects LME copper prices to average about $9,500 a tonne in 2024 (up from $8,700 in 2023) and rise to $9,970 in 2026.

“We are raising our copper price forecast for 2024 to $9,600 a tonne from $9,200 a tonne as investor sentiment leaning towards a Federal Reserve interest rate cut in the third quarter of 2024 continues to drive prices,” BMI said.

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