Copper drops but prospects remain positive

In our view, the green transformation theme remains a strong tailwind for copper, the best electrical-conducting metal towards the green transformation which includes batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Not least considering how producers face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds. A development that will likely see the market turn into and remain in a deficit in the coming years, thereby underpinning prices in order to support mining companies' profitability and their appetite for embarking on new multi-billion multi-year projects in order to add supply. 

The challenges the sector faces were a key focus at the recently held World Copper Conference in the Chilean capital of Santiago. The main conclusion from the conference, as expected, was that the world’s rising demand for copper will exceed supply over the next decade unless new mines are built. According to Goldman Sachs, regulatory approval for new copper mines has fallen to the lowest in a decade, a major challenge as it often takes 10 to 20 years to permit and build a new mine. 

The bullish outlook for demand in the coming years can be seen through a recent wave of M&A activity:

Glencore Plc offering $22.5 billion to buy smaller rival Teck Resources
Lundin Mining Corp paying nearly $1 billion for control of Chile’s Caserones copper mine
BHP Group Ltd buying Australia’s Oz Minerals in a $6.4 billion deal
Rio Tinto Plc paying $3.3 bn for Turqoise Hill Resources, thereby gaining control over giant Mongolian copper mine
Newmont Corp’s push to merge with Newcrest (gold and copper)
Hudbay Minerals Inc paying $439 million for rival Copper Mountain Mining Corp

In addition, the HG copper contract has also been challenged by speculative fund flows following the recent failed attempt to break higher. According to the weekly Commitment of Traders report, the copper long jumped 230% to 19.8k contracts in the week to April18 in response to the failed, as it turned out, breakout that occurred during the reporting week. It highlights a market where traders are worried about missing the upside once it materializes, but also how failure turns to immediate long liquidation and with that fresh price weakness as seen during the past few trading sessions. 

For now, as per the chart below, the metal is currently looking for support, having initially found it ahead of $3.82/lb, the March low. Additional weakness would bring the 200-day simple moving average, currently at $3.76/lb, back into play. A reminder that it was the break above the 200-DMA back in January which helped trigger strong momentum buying all the way up to $4.3550/lb, the current cycle peak from where the price has been drifting lower since. We maintain our long-held and long-term bullish outlook for copper, but with global growth concerns attracting a great deal of attention, the upside may take longer to materialize.