Copper - it's elemental

This blog was published on 19/06/18 and does not constitute advice, nor should it be seen as a personal recommendation from Societe Generale.  Information quoted within may be out of date at the time of your reading this blog.

Copper is often used as a bellwether for economic health; this is because it is typically used as one of the building blocks for infrastructure around the world.

On a bull rally since 2016 the price of copper has been steadily rising and the decline in copper supply combined with recent output issues in India and Chile could push the price of copper up further.

At the end of 2017 it hit $7,312 a tonne, its highest price since January 2014, and despite several risk-off triggers, copper prices in 2018 have traded between $6,499 and $7,202 a tonne, and averaged $6,950 a tonne – 12% above the average price in 2017.

And there are several supportive factors that could mean coppers price will hold and likely rise.

Stronger-than-expected underlying consumption/demand growth, further disruptions to mines and higher input costs with the production process could all have an impact

Supply has been cut in India, which could support copper prices in the short term. The Tamil Nadu government ordered Vedanta Ltd to shut down the plant permanently following protests that will cut nationwide output and likely increase in demand for imports. The smelter accounts for around 50% of India’s copper output.

The Australian Government suggested last year that India will need a huge amount of copper to help its economy expand over the next twenty years.  

The price of copper is up nearly 22% in the last year based on data from Bloomberg in June 2018. This has been partly attributed to strong global economic growth and demand in China, according to news reports in February 2018.

Prices are potentially being supported by forecasts of a supply downturn in the next few years as a result of old mines coming to the end of their lives and an uptick in demand for electric cars and renewable energy, for which copper is needed to help build the infrastructure.

In May 2018, Leigh Goehring of research firm Goehring & Rozencwajg believes prices could rise as high $21,392 in the next few years, according to an interview with Investing News Network at the Mines & Money Conference.

The FT also reported last December that according to analysts at BMO Capital Markets a copper supply deficit could even start in the middle of next year. “This is the point when any mine supply deficit is likely to lead to sustained outperformance.” .

New supply will come online in Peru, but strong demand growth of 3.5% will continue to outpace supply increases, and prices arguably need to sustainably rise above $7,000/t to incentivise the market to invest in new mining capacity and meet long-term growing copper demand. Until then, market deficits on metal markets are likely to increase, and prices should continue to drift higher in the medium term.

As always, there may be those with a contrarian views to this thinking.

This could present opportunities for investors who are looking to make the most of a price rise in copper and using leveraged Copper ETP’s presents opportunities for sophisticated investors to capitalise on short term market movements. This year has already seen periods of significant short term growth, such as the 6% between 9th Feb and 16th Feb, and with leverage ranging from 2x,3x and up to x5 from Societe Generale Copper range of ETPs (SG36 /SG38/SG40)  for example, even the smallest of price movements could yield impressive returns.

One should however remember that seasonality in copper mirrors that of the overall industrial metals complex, with stronger demand in 2Q and 4Q of each year associated with peak industrial/manufacturing activity. The next three months is not the season of high demand, and hence prices could remain flat, whilst growing geopolitical tensions, swift and strike free wage negotiations and a Chinese hard landing could all have a negative impact on pricing

But remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice. 


Post by: Zak de Mariveles, Head of UK Exchange Traded Products

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