Copper price benefitting from both demand and supply-side catalysts

Demand-side assumptions

Copper, often considered a leading indicator for economic health, has seen gains this year precede upward revisions for global growth. The International Monetary Fund (IMF) now expects Gross Domestic Product (GDP) growth of six percent globally, led by emerging and developing Asia (est. 8.6% year-on-year growth). IMF forecasts for 2021 also anticipate 6.4% GDP growth in the world’s largest economy (the US), 4.4% growth in the Euro area, 4.6% in Latin America and 3.4% in Sub-Saharan Africa.

China remains the primary consumer of industrial metals, most significantly copper and iron ore. Infrastructure spend and stimulus efforts within the region are supporting gains in the metal, although rising prices have started to fuel inflationary fears which could prompt monetary tightening by the People’s Bank of China (PBOC). However, the PBOC is quick to reassure markets that any changes to policy would be gradual and the central bank has pledged not to make any sudden ‘U-turns’ on its accommodative stance.

In the US, the White House has proposed a new $6 trillion budget, with significant allocation towards infrastructure spend, which is also helping buoy short-term gains in the commodity. In president Joe Biden’s proposed budget, an ambitious $2.3 trillion is allocated over the next three years to roads, rails, electric transport and green energy projects.

Major copper producers’ supply-side disruption

Supply-side concerns for copper are extending from the world’s two largest producers of the metal, namely Chile and Peru.

In Chile, workers have downed tools on failed wage negotiations at BHP Group’s Escondida and Spence mining operations. Escondida is the world’s largest copper mine.

In Peru, markets are monitoring campaigning ahead of next month’s presidential elections. Socialist candidate, Pedro Castillo, has suggested that if elected he would look to increase mining royalties and taxes as well as renegotiate large mining contracts within the region.

The copper price remains in a long-term uptrend as indicated by the 50-day simple moving average (green line) trading firmly above the 200-day simple moving average (blue line). In the short-term we see the price breaking out of a bullish flag formation (shaded area).

The flag breakout suggests that the short-term trend is now aligning with the longer term uptrend. Trend followers and pattern traders would look for long entry around current levels, targeting a retest of the high at 10750. Should the copper price instead move to close below the reversal low at 9795, the bullish short-term assumptions would be deemed to have failed.

In summary:

• Copper looks to be renewing its long-term uptrend
• Chile and Peru are the world’s two largest producers of copper
• Labour disruptions in Chile are causing supply concerns
• Electoral campaigning in Peru has seen socialist candidate Perdo Castillo wanting to increase royalties and taxes for miners
• Economic growth has been revised higher by the IMF
• Chinese stimulus and infrastructure initiatives are supporting growth and in turn demand
• US infrastructure spend of $2.3 trillion has been proposed supporting demand-side assumptions for copper
• A technical analysis view sees an upside breakout in line with the longer term uptrend.