• Copper prices have performed strongly since China ended its Covid-Zero policy
  • But Capital Economics thinks they may have run too fast, predicting a tough few months as reality catches up with expectation
  • Miners slide, with gold miners hit hard


Elon Musk may not believe the hype that we need to mine much more of it to bring on the transition to renewable energy, but copper is virtually every mining analyst’s pick as a commodity to watch in 2023.

That has played out so far. China’s re-emergence from the shadows of Covid-19 is setting traders alight, with copper climbing above US$9000/t to trade at US$9315/t on the LME overnight.

At the pace it has been on for much of 2023, up from lows of under US$7500/t, you would think momentum would be pushing it towards all time highs in excess of US$10,000/t.

You’d also think, given copper’s reputation as a thermometer for the global economic temperature, we’d be doing pretty good right now, no recession fears around these parts, no sirree.

That’s not quite the case. The US Fed is nowhere near done with rate hikes, even if they are less severe than last year’s 75bps sledgehammers.

Australia’s 7.8% CPI print today means more will be on the way Down Under too.

Capital Economics commodities economist Kieran Tompkins thinks copper, supported in part by political unrest and mine suspensions in Peru and Chile, the world’s largest producers of the red metal, may have gone too hard, too fast.

“While China’s reopening has improved the prospects for copper demand, the price has, in our view, surged by more than can be justified by developments there alone. We expect the copper price to drop back over the next few months as several advanced economies enter recession,” he said.

“The price of copper has soared in recent months, from below $7,500 per tonne in late October and ~$8,400 at the beginning of 2023, to ~$9,350 currently. Investors have also shifted back to a net-long position for the first time since April 2022.

“That is no doubt due to growing optimism around the abandonment of COVID-19 restrictions in China, which has been compounded by hints from policymakers of support for the ailing property sector and a shift towards more growth-friendly policies.

“That said, the sharp rise in the price of copper appears out of kilter with its reputation as “Dr Copper”. The copper price is rising just as several other major economies are heading for sharp downturns.”


Demand from China not enough

Tompkins says there are three reasons China cannot overcome the overall weakness in the global economy when it comes to copper pricing.

For one, industrial activity in China, the type of thing that spurs copper demand, wasn’t as battered and bruised as other areas of the Chinese economy.

“Even though infections were more widespread in the reopening wave, manufacturing activity still remained remarkably resilient,” Tompkins says.

“Our China Copper Demand Proxy suggests that demand growth proxied by activity in end-use industries was, outside of the period around the Shanghai lockdowns, robust for much of last year. What’s more, China’s imports of copper ore and semi-refined copper actually rose last year.”

On top of that Tompkins says it will take a while before improvements in housing demand flow through to the commodity, while exports won’t be as strong even if China recovers due to flagging growth elsewhere.

It’s not all bad omens though, with CapEcs’ year end outlook still solid.

“That said, we expect copper demand by end-users to rebound later in the year alongside the recovery in economic growth that we forecast,” Tompkins said.

“So, if we are right in this view, we expect the copper price to drop back towards $8,500 per tonne over the next few months.

“But, once growth outside of China accelerates and some recovery in China’s housing market starts to come into view, we think the price could make a subsequent recovery to $9,250 by the end of the year.”


Gold miners carted to the boundary as production disappoints and prices wobble

Speaking of too hard, too fast, ASX gold miners have been on a wild ride in 2023, with the All Ords industry sub-index almost 12% up YTD.

That momentum was halted today with a rare triple whammy. US dollar gold prices weakened, falling 0.5% from eight month highs to US$1928/oz.

Aussie dollar gold prices fell further as the Aussie dollar rose 0.77% against the US benchmark, with the gold price’s slide in Australian terms even more extreme at over 1%.

On top of that producers again disappointed in a big day of quarterlies that saw no fewer than eight companies, including giant Newcrest (ASX:NCM), report their December production.

Worst hit was perpetual disappointment to its parents St Barbara (ASX:SBM), down more than 20% after seeing costs escalate at its Gwalia gold mine near Leonora.

It is merging with Genesis Minerals (ASX:GMD) to form Hoover House, with Raleigh Finlayson’s explorer falling 6.5% on a spillover infection from its soon to be partner.

But those problems were undoubtedly compounded by the general mood of the market. West African Resources (ASX:WAF), Alkane (ASX:ALK), Westgold (ASX:WGX) and Newcrest also found themselves caught up in the sell-off, even with good to fine results out on the market today.

Materials stocks fell 0.74% in general today, with MinRes (ASX:MIN) dropping after revealing lower lithium hydroxide and carbonate prices in the December quarter and delays to a major expansion at its Mt Marion lithium mine amid inflationary pressure and labour market tightness.


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