Copper Could Reach US$6,800 in 2020 as Fundamentals Improve

Copper prices gained more than 26 percent in the second quarter of the year, rebounding from four year lows hit on the back of the coronavirus pandemic.

The second half of the year could see the red metal maintain these levels. Capital Economics is expecting copper to push a little higher in Q3, albeit not as rapidly as it did in Q2.

“The fact that the copper price is now back above where it was pre-pandemic suggests that the coronavirus pandemic has led to an overall improvement in the metal’s fundamental outlook,” Kieran Clancy of Capital Economics told the Investing News Network.

“But while a little counterintuitive, this idea isn’t as farfetched as it first appears. After all, absent the pandemic, policymakers in China wouldn’t be embarking on an infrastructure spending splurge,” he said.

Clancy suspects that a significant amount of supply disruption is already priced into the copper market.

“So if those supply disruptions fail to materialize (or are lower than expected), that poses a downside risk to the copper price,” he said. In fact, supply has been relatively resilient so far this year, which has been somewhat surprising, according to the expert.

“Compared to other base metals, mined copper supply has held up reasonably well, thanks to a surge in Chinese output of copper ore,” Clancy said. “However, with virus numbers in Latin America now climbing rapidly, we think there is significant risk to supply in Q3.”

Looking over to demand, copper demand recovered quicker than many expected in Q2.

“This is almost entirely due to a remarkable bounce-back in Chinese demand, as policymakers there moved to stimulate activity — particularly in the copper-intensive infrastructure sector,” Clancy said. “And with that support set to be stepped up in the months ahead, a further pick-up in Chinese demand will probably remain the key driver in the second half of the year.”

He added that a pick-up in demand outside China will probably be an additional positive at the margin.

But, despite the surge seen in prices in the last three months, the past week has seen investors fly to safe haven assets such as gold and silver as fears of a second wave of COVID-19 increase.

Capital Economics is not yet assuming a second wave in its forecasts, but Clancy said this is a key catalyst that investors should keep an eye out for.

“However, even if a second wave were to materialize, we are unlikely to see a return to the nationwide lockdowns we saw earlier this year,” Clancy said. “Instead, policymakers are likely to opt for localized lockdowns, which would be less damaging to copper demand and supply.”

Capital Economics has increased its forecasts for the year from US$5,500 per tonne to US$6,800. On Wednesday (July 22), copper was trading at US$6,513.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.