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What’s Next for Copper? How Mortgage Boycotts, A Smiling Dollar and Clean Energy Impact Copper Prices

August 24, 2022

 

 

Compared to the first half of 2022, copper prices are down. This shift is generally good for our industry because copper is a major component in electrical infrastructure and construction.

But what will happen to copper next? Three main factors are driving copper prices down in the short term, but two trends may cause them to rise again in the long term.

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What’s pulling copper prices down?

1. Demand for copper is falling in China.

China is the world’s largest consumer of copper (54%), so it has an outsized influence on copper prices.

China uses copper in manufacturing and construction. But since one-fifth of the world’s population lives in China, the country’s domestic consumption has an enormous impact on copper.

A decline in construction is one reason demand for copper is down.

Continued COVID-19 lockdowns are also limiting manufacturing demand for copper.

All these factors mean China is exporting more copper than usual. Late last year, China reported record exports of copper.

In the United States, demand for copper has been strong, but construction has slowed due to recession fears.

 

2. The U.S. dollar is strong right now.

Since commodities are quoted in U.S. dollars, commodity prices tend to fall when the U.S. dollar is strong. Currently, the dollar is at a 20-year-high, pushing copper prices down.

The dollar’s strength grows when the U.S. economy is healthy or the global economy is weak — a concept known as the “smiling dollar.” Right now, the global economy is not doing well, so “people are jumping to the U.S. dollar as a haven.”

 

3. Copper is less impacted by the Russia-Ukraine conflict.

The Russia-Ukraine conflict is having a significant impact on oil, gas, aluminum and other raw materials. Copper, on the other hand, is less affected by the conflict because Russia only accounts for 4%–5% of global copper production.

  • Eleven of the 20 biggest copper mines are in Chile and Peru (40% of mined copper).
  • Nine of the 20 biggest copper smelters are in China.

 

What’s pushing copper prices up?

1. Demand from the clean energy transition will only grow.

S&P Global predicts that annual global usage of refined copper will more than double from 25 million tonnes in 2021 to 52 million tonnes in 2050.

Most of this growth will come from applications such as construction, appliances, phones and data processing. However, clean energy will capture an increasingly larger share.

  • In 2021, 32% of demand for copper came from the energy transition.
  • By 2050, 43% of demand for copper will come from the energy transition.

This increase will occur because green technology uses large amounts of copper.

  • Offshore wind requires 3 times as much copper as natural gas generation.
  • An electric vehicle requires 4 times as much copper as a conventional vehicle.

For this reason, the amount of copper needed for cars is predicted to grow by 143% between 2020 and 2040.

 

2. Global copper inventories are low.

When demand started rising and copper began trading at record levels above futures contracts, firms sold large portions of their copper inventories. The result was that global copper inventories hit a 47-year low last fall.

The world won’t run out of copper anytime soon — 870 million tonnes of copper deposits currently sit in the Earth’s crust. However, accessing all that copper will require greater investment in mining, smelting, refining and recycling.

  • Copper prices typically fall when interest rates rise, which usually slows demand due to the higher cost of borrowing.
  • Since global inventories were already low, copper prices still rose in July despite the Federal Reserve’s consecutive interest rate hikes.

The Inflation Reduction Act presents another variable that may help drive the price of copper downward. The act focuses on lowering energy costs, increasing clean energy production and reducing carbon emissions by 2030.

 

Conclusion

Softening global demand — especially in China — and a strong U.S. dollar in the face of global uncertainty have recently pushed copper prices down. But increasing demand for green technology and low global inventories will pull copper upward over the long term.

At the same time, copper prices will follow in the direction China leads. If China’s economy weakens, the rate at which copper prices rise will slow. But if their economy improves, or their relations with the U.S. deteriorate, copper prices will increase more quickly.

 

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Disclaimer

Our information is compiled from several sources that, to the best of our knowledge and belief, are accurate and correct. Border States accepts no liability or responsibility for the information published herein. These materials are provided for informational use only and do not, nor are they intended to, constitute legal advice.

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