The Impact of China and the Energy Transition on Copper Prices

Recently, the London Metal Exchange (LME) saw the three-month futures price of copper hit an all-time high of US$11,104 per metric ton. This surge in price has sparked interest among investors tracking the copper market closely. But what exactly should investors be aware of when monitoring the copper price today? Here are four key factors that play a significant role in shaping the supply and demand dynamics of copper:

1. How does China affect copper demand?

China, the fourth largest copper-producing country globally, holds a dominant position in the copper demand landscape, accounting for approximately 55% of global consumption. Of this, 30% is attributed to China’s building and construction sector. Historically, fluctuations in demand from China have directly impacted copper prices, with surges leading to price highs and downturns resulting in significant drops. The recent slowdown in demand from China’s real estate sector has added downward pressure on copper prices, despite record highs experienced earlier.

China’s influence on global copper prices extends to its role as a leading copper smelter, with production levels impacting market volatility. Reductions in Chinese smelting output have been known to drive up copper prices, as seen with a 3% increase following a collective cut in output earlier this year.

Despite reaching record highs in the face of supply chain disruptions, softer demand from China continues to impact copper prices, with the red metal currently trading around US$4.50 per pound as of mid-June.

2. How much copper is needed for the energy transition?

The ongoing energy transition has accelerated the demand for copper, particularly in renewable energy and electric vehicle (EV) sectors. Research suggests that EVs, in particular, require a higher copper load compared to traditional internal combustion engine vehicles. With the push towards renewable energy sources, demand for copper from solar and wind technologies has also surged.

To meet ambitious climate goals, demand for copper is expected to rise significantly, potentially resulting in a supply deficit. The energy transition is projected to push global copper demand to new heights, with the need for additional mine supply becoming increasingly critical.

3. How does mine production impact copper supply?

Mine disruptions, whether due to external factors like extreme weather or internal challenges such as labor disputes, have historically influenced copper prices. In recent years, operational shutdowns resulting from the COVID-19 pandemic significantly impacted copper mining operations in key producing countries like Chile, Peru, and Mexico.

Political instability in major copper-producing regions such as Peru and the Democratic Republic of Congo (DRC) has also posed challenges to mine production. For instance, protests in Peru disrupted mining activities, while the forced closure of a major copper mine in Panama led to a substantial reduction in global supply.

Anticipated supply shortages have led industry experts to forecast significant deficits in the coming years, with demand from the energy transition exacerbating the imbalance.

4. How do inventory levels affect copper supply?

The ebb and flow of copper inventories have a direct impact on market sentiment and pricing. Increasing stockpiles can weigh down the market, while decreasing inventories often result in price hikes. Notably, declining inventories in recent years contributed to a surge in copper prices, prompting increased demand for secondary copper sources like scrap metal.

Monitoring copper inventories globally provides valuable insights into the supply landscape, with inventory levels in key markets like China influencing market trends. As inventory levels fluctuate, market dynamics shift, reflecting changes in supply and demand.

What’s the outlook for copper?

In the long term, copper remains a key player in the global transition towards sustainable energy and infrastructure development. Supply-side challenges and increasing demand are expected to drive copper prices higher, with experts predicting a bullish outlook for the red metal.

Market forecasts indicate a steady increase in copper prices over the next few years, supported by growing demand and limited new mine supply. Legislative initiatives promoting green technologies and sustainable practices are also expected to bolster copper demand, further underpinning the positive outlook for the metal.

In summary, the interplay of China’s demand, the energy transition, mine production, and inventory levels will continue to shape the copper market, offering opportunities and challenges for investors seeking exposure to this vital industrial metal. Stay tuned for real-time updates by following us on @INN_Resource.

This article was originally published by the Investing News Network in 2015 and has been updated with current information.

Disclaimer: The author, Melissa Pistilli, has no direct investment interest in any companies mentioned in this article.