Copper prices should remain supported near decade-highs at $US4 a pound (~$US9,000/t) through the middle of 2021, CBA says.

Since peaking near decade-highs in late February, prices have eased back slightly amid renewed strength in the US dollar as well as demand concerns stemming from more COVID-19 restrictions (largely in Europe).

Analyst Vivek Dhar noted that along with those demand concerns, copper stockpiles in London and Shanghai “have lifted over 150 per cent since bottoming on 2 February”.

However, Dhar said a number of macroeconomic tailwinds are still in play that should see copper consolidate at the $US4/lb level (up from ~$US2.30 at this time last year).
 

Copper prices

As a malleable metal that is also a good conductor of heat and electricity, copper’s many use-cases means it’s sometimes referred to as “Dr Copper” due to its accuracy as a gauge for broader economic activity.

On that front, Dhar said plenty of areas are still trending in the right direction.

For starters, monthly industrial production prints out of China are still rising — an indication the country is still committed to its post-COVID infrastructure push (also the primary demand-side catalyst for iron ore’s push above $US160 per tonne).

That’s important because on a global level, China accounts for more than 50 per cent of total copper demand, Dhar said.

Elsewhere, industrial production in South Korea is back above pre-COVID levels with strong growth in other major economies across the US, Europe, Japan and India.

“Manufacturing PMIs paint an even more optimistic demand picture — especially outside China,” Dhar said.

As a case in point, he cited March data for the US ISM manufacturing index which showed it just rose to the highest level in 38 years.

Copper prices have also been supported by rising growth expectations stemming from the successful COVID-19 results in November.

Meanwhile, US President Joe Biden has submitted the first version of his ambitious $US2 trillion infrastructure package to Congress.

While compromise will inevitably be required to seal its passage into law, the draft is evidence that US lawmakers are still committed to a big domestic infra push of their own.

In addition, Dhar said the macroeconomic trend towards decarbonisation is also positive for long-term copper prices.

“Around four times more copper is used in an electric vehicle than a regular internal combustion engine (ICE) automobile,” he said, while renewable energy power systems require five times as much.
 

Looking ahead

While copper should hold at current levels until mid-year, Dhar said he expects prices to ease back to around $US3.60/lb in the second half of 2021.

That’s largely due to the demand outlook from the world’s biggest copper consumer — China.

In terms of commodities, the bulk of China analysis relates to how long policy makers will stay committed to the infrastructure boom that took place in 2020.

Dhar said the evidence suggests they are scaling back, starting with a smaller budget deficit target outlined in the 2021 Government Work Report.

In addition, authorities also decided on a smaller allocation of special local government bonds — a key financing feature of China’s 2020 economy that provided the impetus for regional construction activity.

“The People’s Bank of China (PBOC) have reportedly even told China’s largest banks to curtail loan growth for the remainder of this year,” Dhar concluded.