Copper Defies Downdraft in Metals, China Growth

Originally Posted, 14 May 2024 – Copper Defies Downdraft in Metals, China Growth

Copper prices have charted their own course over the past two years, decoupling from base metals such as steel, battery metals lithium and cobalt, and ferrous metal aluminium.

While copper prices have risen by about 2% from the end of Q1 2022, steel prices are 26% lower over that period, aluminum prices are down 29% and the prices for cobalt and lithium used in EV batteries have tumbled by 64% and 77%, respectively (Figure 1).

Figure 1: Copper has outperformed base, battery and ferrous metals

Figure 1: Source: Bloomberg Professional (ALE1, HG1, LFA1, CVT1, HRC1) – Past performance is not indicative of future result

Not only has copper defied the general downdraft in the prices of other industrial and energy transition-related metals, it has also bucked the downtrend in crude oil, with which copper has typically demonstrated a significant degree of co-movement over the past few decades.  Since 2022, oil prices first fell and then traded in a range.  By contrast, copper prices rose significantly in late 2022, then dipped for a while, and are now on their way back towards record highs (Figure 2). 

Figure 2: The energy intensity of copper mining may explain its correlation with

Figure 2: Source: Bloomberg Professional (CL1 and HG1) – Past performance is not indicative of future result

Copper has also diverged from China’s economy.  Historically, copper prices followed Chinese growth with a lag of anywhere from a few months to one year.  China’s pace of growth peaked in 2021 and has been slowing since.  Yet, copper has risen anyway (Figure 3). 

Figure 3: Copper has also decoupled from China’s overall rate of growth

Figure 3: Source: Bloomberg Professional (HG1 and CLKQINDX) – Past performance is not indicative of future result

The only market that copper has maintained its price relationship with is U.S. equities (Figure 4).  Copper has a longstanding positive correlation of variable strength with U.S. stocks that dates back decades (Figure 5).

Figure 4: Copper has kept pace with U.S. equities so far this decade

Figure 4: Source: Bloomberg Professional (SPX and HG1) – Past performance is not indicative of future result

Figure 5: Copper has had positive 1Y rolling correlations with the S&P since 1999

Figure 5: Source: Bloomberg Professional (SPX and HG1) – Past performance is not indicative of future result

So, what’s behind copper’s strength relative with its peers in the metals group, to crude oil and to the pace of growth in China. The answer seems to boil down to two factors: the energy transition and supply. 

Copper’s divergence versus crude oil, aluminum and steel began in earnest in the fall of 2022 when the U.S. passed the Inflation Reduction Act, which, among its many provisions, authorized $60 billion for investment in electric vehicle recharging stations and paved the way for large investments in the electric grid and alternative energies, all of which involve the use of substantial amounts of copper. Since then, Europe has embarked on a smaller but still significant program of investment in the energy transition. Copper’s fortunes appear to have been further boosted by the growth of EV sales, particularly in China where they accounted for 35-40% of all vehicles sold in 2023.

The heightened demand for copper has collided with slow growth in copper mining supply.  Over the past 30 years, copper mining supply has risen by only 133%, much less than the pace of growth in ferrous metals, which have seen growth of 165-240%, or aluminum, which is up over 265%. The growth of copper mining output has been particularly slow since 2014 (Figure 6).

Figure 6: Copper supply is among the slowest growing of any base or ferrous metal

Figure 6: Source: US Geological Survey, National Minerals Information Center, Mineral Commodity Summaries 1994-2020 – Past performance is not indicative of future result

Copper’s outperformance relative to lithium and cobalt can also be attributed to supply.  The two battery metals, in theory, should be among the primary beneficiaries of the increased demand for EV batteries. That increased demand, however, has been swamped by rising supply.  Lithium mining production has risen by 28-fold (Figure 7).  Cobalt production has surged by over 12 times (Figure 8).  

Figure 7: Lithium supplies have grown by 2,750% in 30 years

Figure 7: Source: U.S. Geological Survery, Lithium Statistics and Information, Annual Publications 2005-2023 – Past performance is not indicative of future results

Figure 8: Cobalt mining supply has risen by 1,200% since 1994

Figure 8: Source: U.S. Geological Survery, Cobalt Statistics and Information, Annual Publications 1994-2021 – Past performance is not indicative of future results

All in all, this explains the extraordinary bear market in lithium and cobalt prices as well as why the futures curves, although in contango, don’t price much of a recovery for either metal over the next 12-18 months (Figures 9 and 10). 

Figure 9: Cobalt and lithium prices are trading 67-75% off their highs

Figure 9: Source: Bloomberg (CVT1 and LFA1) – Past performance is not indicative of future results

Figure 10: Although in contango, cobalt & lithium curves aren’t pricing much of a recovery

Figure 10: Source: Bloomberg (CVT1…CVT26 and LFA1…LFA 16) – Past performance is not indicative of future results

The key question on the demand side is will the high price of copper incentivize additional supply growth?  Likewise will the low price of cobalt and lithium boost demand for batteries, and will they discourage such rapid growth in mining output?