Sky-high Demand, Recession Alarm: What Dangerously Sinking Copper Prices Mean For The World

Copper witnessed its biggest and worst weekly plunge in a decade in March 2020 and the price continue to fall, indicating a tattering state of the global economy. But the metal may still have room to fall before its role in renewable energy provides long-term support.

The commodity is known as ¡°Dr Copper¡± because it is a good indicator for the health of the global economy as it is used as a raw material in a variety of products.

Also known as an economic bellwether, copper ¡ª used in everything from computer chips and toasters to power systems and air conditioners ¡ª has fallen nearly a one-third since the early onset of the coronavirus pandemic. Falling prices may indicate a sour outlook as fears mount over a global economic slowdown.

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What is happening and why are we talking about it?

Prices of copper, often used as an economic parameter, drifted lower on Wednesday as investors anticipated another aggressive interest rate hike from the U.S. Federal Reserve. So, investors are now selling on fears that a global recession will halt demand for a metal that's synonymous with growth and expansion.

You wouldn't know it from looking at the market today, but some of the largest miners and metals traders are warning that in just a couple of years' time, a massive shortfall will emerge for the world's most critical metal ¡ª one that could itself hold back global growth, stoke inflation by raising manufacturing costs and throw global climate goals off course. The recent downturn and the under-investment that ensues only threatens to make it worse.

¡°We'll look back at 2022 and think, ¡®Oops,¡¯" said John LaForge, head of real asset strategy at Wells Fargo. ¡°The market is just reflecting the immediate concerns. But if you really thought about the future, you can see the world is clearly changing. It's going to be electrified, and it's going to need a lot of copper."

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Why is copper important?

Copper is essential to modern life. There¡¯s about 65 pounds (30 kilograms) in the average car, and more than 400 pounds go into a single-family home. The metal, considered the benchmark for conducting electricity, is also key to a greener world.

While much of the attention has been focused on lithium ¡ª a key component in today¡¯s batteries ¡ª the energy transition will be powered by a variety of raw materials, including nickel, cobalt and steel.

When it comes to copper, millions of feet of copper wiring will be crucial to strengthening the world¡¯s power grids, and tons upon tons will be needed to build wind and solar farms. Electric vehicles use more than twice as much copper as gasoline-powered cars, according to the Copper Alliance.

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What would sinking prices do?

Inventories tracked by trading exchanges are near historical lows. And the latest price volatility means that new mine output ¡ª already projected to start petering out in 2024 ¡ª could become even tighter in the near future.

Just days ago, mining giant Newmont Corp. shelved plans for a $2 billion gold and copper project in Peru. Freeport-McMoRan Inc., the world's biggest publicly traded copper supplier, has warned that prices are now ¡°insufficient" to support new investments.

Copper crunch

Commodities experts have been warning of a potential copper crunch for months, if not years. And the latest market downturn stands to exacerbate future supply problems ¡ª by offering a false sense of security, choking off cash flow and chilling investments. It takes at least 10 years to develop a new mine and get it running, which means that the decisions producers are making today will help determine supplies for at least a decade.

Recession alarm

The current global economic malaise also underscores why the chief economist for BHP Group, the world¡¯s biggest miner, just this month said copper has a ¡°bumpy" path ahead because of demand concerns. Citigroup Inc. sees copper falling in the coming months on a recession, particularly driven by Europe. The bank has a forecast for $6,600 in the first quarter of 2023.

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Deterrent to combating climate change

Of course, all those mega-demand forecasts are predicated on the idea that governments will keep pushing forward with the net-zero targets desperately needed to combat climate change. But the political landscape could change, and that would mean a very different scenario for metals use (and the planet).

How will the prices reflect?

The price of the red metal logged its biggest quarterly drop since 2011 in the second quarter of this year, according to Reuters.

Three-month copper on the London Metal Exchange is down 2.8% at $6,968 a tonne and the Bloomberg Industrial metals index has slumped to a 17-month low amid concerns that rampant inflation will curb spending by large manufacturers. On Wednesday, copper settled at $7,690 a ton on the LME.

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Goldman Sachs forecasts that the benchmark London Metal Exchange price will almost double to an annual average of $15,000 a ton in 2025.

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