Copper: long-term promise cannot overcome bearish tone

If physicians make the worst patients, Dr Copper is suffering. Said to offer a prognosis on the world’s economic health, copper’s price has dropped more than a third since early March. The red metal’s vital role in the impending energy transition seems to have lost its urgency. A good long-term prognosis does not prevent further falls in the short term.

Copper’s long-term positives are legion. For one, supply dwindles each year as the percentage of copper in mined ores diminishes, raising costs. Economies shifting away from fossil fuels also require more copper. Wiring electric cars and buses — hybrid and full battery — will require 1.2mn tonnes of copper in 2025. That is more than double the amount needed last year, says the International Copper Association. World consumption is about 24mn tonnes.

But the long term matters little to those losing money in copper miners now. London-listed Chilean copper miner Antofagasta trades on an enterprise value to ebitda multiple of just four times. That is at decade lows, never mind that the underlying commodity sits at only the midpoint of its own 10-year range.

The price of copper has fallen near the long-term economic price of roughly $3 per pound, around which the traded value fluctuates. Six years ago, notes Tom Price at Liberum, analysts would have pointed to that price as providing an incentive to production. Back then, China’s economy also had slowed sharply and its property market looked in serious trouble. Copper touched $2 and rebounded. See that as a worst-case scenario.

Even so, that suggests copper has further to fall this year. It may explain the growing net short positions of copper traders as reported by the US Commodity Futures Trading Commission. That net sell position has been larger in recent history, but not by much more. Keep monitoring the patient’s vital signs. Copper’s sell-off has not finished.