Outlook for the Price of Copper

Bloomsbury Minerals Economics (BME) has published an update of its report on “The Short-, Medium- and Long-term Outlook for the Price of Copper”. The report concludes that shortages of new mine projects at attractive grades, plus limits on the rate of capacity growth, combined with the need for high prices to suppress demand growth, together imply a forward-looking long-term equilibrium copper price of at least US$5,500 per tonne (in constant 2010 terms). BME also concludes that in the medium term, investment by commodities index funds will keep the price higher, mostly between $6,000 – 8,000 per tonne. BME also calculates that if copper ETFs are developed on a large scale, they could add perhaps a further $1,000 per tonne for a while, but at the cost of further stock increases and much higher price volatility.

The study has several unique features.

It is we believe the first research exercise to have explored fully the implications of the growing long positions of commodity index funds. Initially, they have of necessity to draw in extra speculative shorts in the nearby futures market as counterparties and that only happens if prices rise. By creating higher prices, a physical market surplus is created and excess stocks accumulate on the exchanges. With the market firmly established in nearby contango, the owners of these incremental exchange stocks make contango-earning hedge sales in the futures market. Thus increasing investment longs in time acquire two sets of counterparties: speculative shorts and stock owners’ hedge shorts. A market is created that has higher prices and not only requires higher stocks, but creates them. BME explores the implications and also how ETFs might further affect the market.

Second, the study incorporates the results of a recent survey of investors’ intentions with regard to commodities holdings, and their ideas on the optimum share of commodities in a portfolio, as one of the futures market’s new fundamentals.  

Third, with regard to projects, the study does pay regard to trigger prices, but also examines the possibility of absolute constraints on net mine production growth, stemming from rapid erosion of existing capacity, from long-drawn out permitting processes, shortages of engineering services and some equipment, shortages of water, shortages of electric power and transport infrastructure. The study explores what price levels would be needed to constrain copper demand growth to match supply growth, with answers of $5,500 if mine capacity growth can reach 2.5% pa (BME’s base case), $6,000 if mine capacity growth cannot exceed 2.0%, $6,500 if 1.5% is the limit.

The study’s sections are:

Executive Summary

Relationships between prices and stocks

Relationships between prices and production costs

The same changes in price behaviour seen in gold as well as copper

Measuring the extent to which copper price behaviour has changed

Forecasting a market where investors drive copper prices which then drive the physical market balance as well as vice versa

Future levels of direct investment in commodities

Longer-term impact of prices on copper consumption growth

Longer term impact of prices on copper production growth

BME’s base-case short-, medium- and long-term copper price forecasts

Alternative scenarios and alternative approaches to ‘equilibrium’