Study Group Delivers Sobering Message for Copper Bulls: Andy Home, Reuters

LONDON (Reuters) – Copper prices have experienced a significant surge this week following China’s announcement of a stimulus package, which has reignited investor interest.

Optimism surrounding the potential recovery of China’s manufacturing sector has driven the price of three-month copper on the London Metal Exchange (LME) above the $10,000-per-metric-ton mark for the first time since July. This shift in sentiment is reflected in the sharply declining copper stocks in Shanghai over recent weeks.

Despite the bullish sentiment, market analysts caution that copper investors may be overestimating future demand. The International Copper Study Group (ICSG) has recently updated its projections for global copper supply and demand, indicating an anticipated surplus.

The ICSG reports a projected global supply surplus of 469,000 tons for this year, followed by an additional surplus of 194,000 tons in 2025. This oversupply is more than double what was estimated at the Group’s last meeting in April.

The surplus forecasts are largely dependent on supply-side factors, which are generally more transparent than demand calculations. The ICSG’s demand figures for China are based solely on reported data, like stock levels and trade flows, and fail to account for strategic inventory changes that can impact market balance.

The Group anticipates a 1.7% growth in copper mine production for 2024, a significant revision from the previous estimate of 0.5%. This growth is expected to accelerate to 3.5% the following year thanks to increased capacities at major mines such as Kamoa-Kakula in the Congo and Oyu Tolgoi in Mongolia, as well as the production start at the new Malmyzhskoye mine in Russia. Refined copper production is now projected to grow by 4.2%, up from an earlier estimate of 2.8%.

There is a noticeable discrepancy between the growth rates of copper mine and smelter production, leading to pressure in the raw materials segment. Spot treatment charges from smelters, which process concentrated ores into refined copper, are nearly negligible, reflecting low profitability. While this leads to narratives of copper scarcity, it is important to note that low treatment charges are also indicative of increased smelting capacity, particularly in China.

Despite earlier plans to lower production rates, Chinese smelters have continued to increase output, with refined copper production rising by 6.2% year-on-year in the first eight months of 2024. The industry’s leading producers are now advocating for some restraint, though the actual impact on production levels remains uncertain.

While there are some constraints in the raw materials supply chain, overall copper availability is not an issue. Global exchange inventories reached a four-year high of 599,000 tons at the end of August. Even with a decline of 100,000 tons this month, the current levels remain 284,000 tons higher than at the beginning of 2024.

The global surplus in copper has been somewhat masked by regional shortages. Recent low inventories and a squeeze on U.S. contracts highlighted issues related to the physical delivery capabilities of the CME. Stocks in CME are increasing quickly, especially after Chinese smelters redirected metal to LME warehouses due to lack of direct delivery options.

As for demand outlooks, the recent price increases have been largely driven by renewed optimism about Chinese copper consumption. However, the ICSG’s projections predict only a modest growth of 2.0% in copper usage in China for this year and 1.8% in 2025. The rest of the world is expected to show slightly better performance after a contraction in demand last year, but overall global demand growth of 2.2% will significantly lag behind refined production growth, leading to anticipated excess supply.

Interestingly, despite the jump in LME copper prices, there has been no significant change in the forward spreads. The LME cash-to-three-months spread continues to indicate a contango market, underscoring that the global copper supply remains secure.

Market participants should be cautious not to overlook the prevailing dynamics, as past patterns suggest that rapid price increases can sometimes lead to an eventual retreat once supply conditions are revisited.