Copper Fundamentals Strong, Iron Ore Weak: BofA Insights

Analysts at BofA Securities have provided insights on two significant industrial metals, copper and iron ore, highlighting their contrasting market conditions.

Copper is currently in a favorable position, driven by strong demand, limited supply, and increased investment in energy transition initiatives. The metal’s prices have demonstrated notable resilience in 2024, climbing 6% year-to-date despite broader global economic challenges. Analysts at BofA attribute this strength to several critical factors, including a tight supply environment. Reduced output and challenges in refining processes have tightened copper availability. Additionally, treatment and refining charges have fallen sharply, indicating significant hurdles for smelters in processing copper at present.

Investment in energy infrastructure, particularly related to decarbonization projects such as grid expansions, has bolstered copper demand significantly. In China, while demand from sectors such as housing has weakened, investments in the electricity grid have provided essential support for copper consumption. Supply chain disruptions and limited concentrate availability have further exacerbated the supply constraints, fostering expectations of a market deficit that propels prices higher. Analysts predict that as manufacturing stabilizes and interest rates decrease, copper prices could continue to rise, possibly reaching $10,750 per ton by 2025.

Conversely, iron ore is grappling with declining demand, particularly influenced by the downturn in China’s real estate sector, which has historically been a major consumer of the commodity. The sector’s share of iron ore consumption has plummeted from 50% in 2010 to just 20% in 2024, primarily due to government restrictions on speculative investments and a prolonged slowdown in housing construction. Furthermore, steel production—closely tied to iron ore demand—has also been decreasing. Although some other sectors, like machinery, have provided a degree of support, it has not been sufficient to offset losses from the construction decline.

The negative margins faced by steel mills in China have led to additional production cuts, while major iron ore producers in Australia and Brazil have continued to ramp up exports, worsening the oversupply situation. Analysts predict that with a surplus of 190 million tons, which represents about 7.5% of the total supply expected for next year, prices may fall below $80 per ton unless significant production cuts are implemented.

The divergence between copper and iron ore markets can be attributed to their respective supply and demand fundamentals. Copper, essential for the global shift to renewable energy and characterized by tight supply, is forecasted to maintain price support. In contrast, iron ore, reliant on the troubled property sector in China and facing growing global supply, is likely to experience ongoing downward price pressures.

BofA remains optimistic about copper, citing strong structural demand and anticipating continued price appreciation as global economies stabilize and green energy initiatives expand. However, the outlook for iron ore seems bleak, with expected oversupply and weak demand likely leading to further price declines unless significant adjustments in production occur.