The banking crisis, higher interest rates and slower growth projections in China have all weighed heavily on copper’s outlook for 2023.
But given much of this weakness has already played out in the stock markets this year…could we be on the verge of a shift in sentiment?
In my mind, it’s inevitable that the market will experience a sharp pivot away from weak short-term demand drivers — instead focusing on long-term structural supply problems affecting copper supply.
But the question is…WHEN will this happen?
To answer that, we’ll turn our attention to the crystal ball gazing of technical analysis.
Just like my background in geology, this is an inexact science. Yet it can offer investors early indications for a top or bottom in the market.
Market recap: from panic to recovery
Let’s start by switching back to March 2020…as you’ll recall, stock markets were in a panic.
The COVID pandemic triggered a major sell-off in global equities…copper futures sank to multi-decade lows.
I’ve marked this major low on the monthly chart for copper futures below.
From the all-time low made in March 2020, copper prices rapidly accelerated into a March 2022 top. This was a retesting of the extreme high made at the peak of the last commodity boom in 2011 (red ellipsoids above).
But after testing these all-time highs, copper futures continued to move lower. With the outlook for global growth cooling, the remainder of 2022 witnessed further selling pressure.
Importantly though, despite the dire situation playing out for copper’s outlook, rising rates, global recession, and China lockdowns…the metal maintained its long-term upward trajectory.
As you can see, copper made a sequence of ‘higher lows’ in second half of 2022 and into 2023.
Despite all the volatility, the long-term trend held…you can see that on the traced line above.
This brings me to today’s price action.
Recent price action and the potential shift in sentiment
The copper futures market was recently up by a considerable 2.6% in a day. This was a retest of this long-term trend pattern I’ve shown you on the chart above.
While we can’t be certain, the technical analysis offers probabilities, NOT absolutes. Given the trend has held through a tumultuous period for equities — COVID, the war in Ukraine, and record rates of interest rate hikes — suggest the long-term ‘technical’ outlook remains strong.
This is contrary to most analyst projections right now.
But the trend pattern offers us an interesting point of differentiation that could allow investors to capture early gains in a change of sentiment.
But in terms of copper, I like to look at the long-term fundamental picture and overlay that with buying opportunities, just like the one I showed you above.
And when it comes to fundamentals…supply is key.
Understanding the copper supply story
As I explained to my readers last year, Chile is the backbone of the world’s copper supply.
To understand copper, you must understand what’s going on in this South American country.
Chile accounts for around 25% of global copper production.
But right now, Chile’s copper miners are facing MAJOR hurdles in maintaining a long-term output of around 5 million tonnes per year.
Decade-old mines, lack of investment into future development and exploration, weakening production attributed to critically low water supplies, declining grades, and a growing risk of nationalisation…
The threat to Chile’s copper output has never been so great.
But the global supply issue has recently become worse.
Bloomberg recently reported production across Chile’s copper mines is expected to fall by 7% after the country posted its lowest output in six years.
This recent production shock is being blamed squarely on declining grades.
That’s a problem pointing toward long-term supply deficits…
You see, unlike production shortfalls that are attributed to operational breakdowns or adverse weather events, reduced output from lowering grades is a sign of terminal decline.
As miners move to the fringes of these decade-old operations, it means lower output becomes the norm rather than the exception.
But far from addressing the issue, Chile’s left-wing government is adding more pressure to global copper supply…
Chilean President Gabriel Boric recently announced that the country is pushing ahead with nationalising its lithium industry.
Chile is the world’s second-largest lithium producer and hosts some of the world’s biggest international lithium miners, including the US giant, Albemarle.
Again, the looming threat of nationalisation in Chile was a threat I highlighted to my readers last year. Back then, very few industry insiders believed this was possible.
Nevertheless, the country’s government has just taken this unprecedented step.
So why does the nationalisation of lithium matter for copper?
Well, as Reuters reported earlier last year, Chile has been laying down the constitutional groundwork to nationalise its copper industry.
Its latest move to bring lithium mines under state control is its CLEAREST warning yet…
Copper could be NEXT.
So, what does that do to supply?
Traditionally, Chile has been an attractive destination for multinational miners pouring billions into developing its enormous porphyry copper deposits.
They are among the largest in the world, offering miners decades of output.
But the world’s largest miners BHP Group [ASX:BHP], Glencore [LSE:GLEN], Southern Copper [NYSE:SCCO], and Rio Tinto [ASX:RIO] are nervous.
The global centre for copper production has moved from being one of the most desirable places for investment to a region with almost unbearable jurisdictional risk.
That’s bad news for future supply…new discovery and development are set to grind to a halt just as output faces terminal decline in the world’s most important copper-producing nation.
With the risk of nationalisation looming large, international capital needed for development and future discovery is set to pour out of the country.
Yet, Chile is not isolated in terms of the looming supply threat.
Following a controversial election late last year, riots and violent protests have erupted across the world’s second-largest copper-producing nation…Peru.
It has caused a shutdown of some of the world’s biggest copper mines.
Notably, Glencore’s enormous Antapaccay project recently scaled back capacity thanks to nationwide protests that saw an attack on the mine in December 2022.
The Las Bambas Facility, supplying around 2% of global copper supply, was also hit by civil unrest.
MMG [HK:1208] has suspended operations indefinitely.
Output aside, geopolitical instability will have long-lasting effects in this important copper-producing nation.
Just like those in Chile, operators are being forced to shelve important development and exploration projects needed to maintain future output.
Why this issue holds significance for investors
Together, Peru and Chile account for a staggering 35% of the global copper supply.
Comparing that figure to global oil supply, it equates to the combined output of the world’s four biggest oil producers…Saudi Arabia, the US, Russia, and Canada.
It means an enormous, concentrated risk for this critically important metal…just as the world demands more of it as it attempts to build out the renewable energy infrastructure.
As an investor, the looming copper shortage is an opportunity you should be paying attention to.
For my subscribers at Diggers and Drillers, we have been on pause in terms of adding more copper stocks to our portfolio…our last addition was back in December 2022.
But as I highlighted above, the most recent technical set-up could offer investors a rare entry point to start accumulating a long-term position.
That’s what we recently initiated — increasing our copper exposure in anticipation of a change in sentiment.
Seize the opportunity with Diggers and Drillers
For subscribers of Diggers and Drillers, we have been closely monitoring the copper market, carefully identifying the most promising opportunities for our portfolio.
In line with our insights, we recently initiated an increase in our copper exposure, anticipating a forthcoming change in sentiment.
If you’re ready to seize the potential gains in the evolving copper market and the wider commodities sector, check out my latest presentation here.
Editor, Fat Tail Commodities