The copper-to-gold ratio has lagged significantly behind other risk assets. Will copper prices reverse this year?

The latest research report from Goldman Sachs shows that the copper market is expected to experience its highest level of tightness since 2021, facing a projected deficit of 428kt in 2024, with merely 260kt of currently visible stock.

Over the past three months, the market has been impacted by a supply shock due to a succession of downgrades in mine production. Panama's decision to officially close First Quantum Mining’s Cobre Panama copper mine in December 2023 may further aggravate the copper shortage.

■ Clean energy infrastructure in China strongly supports copper demand

China consumes slightly more than 50% of the world’s copper. Last year witnessed a substantial demand surge, primarily driven by an uptick in solar panel installations and module manufacturing in China, which in turn spurred domestic copper consumption. According to the report by Goldman Sachs, analyst Nicholas Snowdon anticipates a more modest increase in copper demand from the solar sector (+29kt) in 2024. However, he predicts a significant jump in demand linked to wind energy, as the deployment of additional offshore capacity is expected to contribute an extra (+70kt). Moreover, despite a scale-back in government incentives, the Chinese electric vehicle (EV) market has maintained robust growth, with copper demand from the EV segment projected to climb consistently this year (+107kt). Additionally, Snowdon foresees sustained investment in China's electrical grid, which is likely to bolster the expansion of both EVs and renewable energy infrastructures, supporting the demand for copper, especially in the enhancement of rural grid networks.

■ Panama copper mine closures exacerbate supply shock

Over recent months, a succession of disruptions and reductions in mine supply has come to light, causing a steep decline in the projected growth of supply for the year 2024. Notably, the continued halt of operations at the Cobre Panama mine, along with downgrades announced by leading mining companies such as Anglo American, Rio Tinto, and others, has resulted in a reduction of approximately 500kt in the anticipated mine supply for 2024. Goldman Sachs has adjusted its global output forecast for 2024 to 23Mt, marking an increase of 2.5% year-over-year, compared to the 4.4% projected in January 2023. This diminishing surge in supply growth is contributing to an evident tightening of the market, which is expected to become more pronounced after the period of seasonal surplus concludes.

■ Copper inventories are at extremely low levels

Global copper inventories are at extremely low levels in 2024. The congestion at African ports has played a role in the constrained stock accumulation seen year-to-date. Nevertheless, the weekly high-frequency data on arrivals in January indicate a resurgence in the import trend, with projections around ~350kt for the month. This implies that the robustness of China's domestic demand is playing a pivotal role in keeping stockpiles from rising, as opposed to supply chain disruptions. Most importantly, the longer this trend of subdued visible stock accumulation persists, the more significant its impact on pricing will become.

■ Interest rate trends in 2024 could support copper prices.

Elevated interest rates have posed a considerable challenge to the metals industry in Western economies, causing notable distortions in physical demand due to destocking efforts and exerting pressure on sectors that are capital-intensive. In this scenario, the growing likelihood of a rapid reversal of high interest rates amidst a robust U.S. economic environment presents a substantial additional positive element that could contribute to a rise in copper prices. This potential rate unwind could alleviate some of the financial burdens on companies and consumers, thereby stimulating demand for copper and other metals. Study shows that in non-recessionary Fed cutting cycles driven by policy normalization and not a growth scare, such as the current one, copper on average rises ~13% over the 75 days post the first Fed cut.

■ The copper-to-gold ratio is at historically low levels.

The distinct roles of copper versus gold-the red metal's industrial necessity, the popular perception of the yellow metal as a safe haven - can embed useful information in their market prices, particularly in relationship to each other. Broadly speaking, the ratio of copper to gold can serve as an indicator of the market's appetite for risk assets versus the perceived safety of Treasuries.

As the probability of a global recession is declining, risk assets have generally rebounded, such as the rise in stocks. Copper is also one of the risk assets, and its price has lagged behind other risk assets.

Copper prices have been suppressed in the past two years due to interest rate hikes and a slowdown in the global economy. But even so, Southern Copper's (SCCO) stock price rose by more than 50% last year. Once recession expectations are proven to be violated, a superimposed interest rate cut may become a catalyst for copper prices to rise again.

Source: Goldman Sachs, MacroMicro