High copper inventories to weigh on price amid demand recovery

High warehouse stocks of copper are set to drag on prices for the metal amid weak demand and an oversupplied refined market, analysts said.

The London Metal Exchange grade-A cash copper price has dropped 19.7% to $8,671 per metric ton as of Aug. 9, 2023, from a 2024 peak of $10,800.81/t on May 20. Meanwhile, warehouse stocks of refined copper have climbed, while Chinese demand has slowed.

"The second quarter in China tends to represent a period where industrial activity picks up following winter and the Lunar holiday period, but so far this year, this pick-up, which tends to bring down built supplies of key raw materials, has not occurred," said Ole Hansen, head of commodity strategy at Saxo Bank, in an Aug. 9 report. "Instead, we have seen inventories monitored by the major futures exchanges continuing to rise at a rapid pace, signaling a period of a major supply/demand mismatch, primarily due to weak demand."

London Metal Exchange warehouse stocks of copper were up 256.8% year over year as of Aug. 9, while Shanghai Futures Exchange copper warehouse stocks were up 449% over the same period, according to S&P Global Market Intelligence data.

The rise in warehouse stocks puts official copper inventories at levels last seen in early 2020 amid the unfolding pandemic, which weighed on copper consumption as consumers stayed home and factory production slowed, Hansen said.

"Following an initial rise in Shanghai, where the overhang was felt the hardest, material has started to flow into LME warehouses in South Korea and Taiwan, culminating this week when the LME reported a [42,000] ton inflow, the biggest since 2019, bringing total LME monitored stocks near [300,000] tons, further unnerving the remaining bulls," Hansen said.

Analysts said the mid-May price spike was premature and lacked near-term support from supply and demand fundamentals.

Regaining luster

Still, many analysts expect the copper market to recover, though it may take some time for prices to gain strength.

Copper demand stands to gain traction from Chinese plans to spend more on infrastructure, Colin Hamilton, BMO Capital Markets' managing director for commodities, said in an Aug. 12 report.

Hamilton pointed to data showing growing operating rates of copper cathode rod makers this week, as well as a week-over-week drawdown in Chinese copper stocks.

"This is likely being driven by renewed optimism for infrastructure investment in China," Hamilton said, noting a 15% upward revision by the State Grid Corp. of China to its annual budget. "However, it may take some time for this to have an impact on the underlying copper price; copper stocks in China remain almost fourfold higher than they were this time last year."

Investec analysts said they expected the refined copper market to moderate going into 2025, as it becomes more difficult for smelters to source copper concentrate.

"In short, we think it would be premature to abandon copper at this point, and that investors should ride out the current volatility to take longer-term advantage of the favorable market dynamics of rising demand and constrained supply growth through the energy transition, with its likely attendant price benefits and improved investment returns," they said in an Aug. 7 report.

S&P Global Commodity Insights analysts project a 497,000 metric ton surplus in the refined copper market in 2025, but they expect copper concentrate markets to tighten and have forecast a deficit of 1 million metric tons.

The Commodity Insights analysts, like many others, expect copper deficits to deepen later in the decade and into the 2030s as energy transition demand accelerates amid a weak pipeline of new copper mines.