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Dr. Feelgood (Copper)

The rally in Dr Copper, the industrial metal with an honorary PhD in Economics, has been a surprising development for most investors this year. Although we flagged the bullish set up in October last year given constrained supply, physical market deficit, low inventory, and strong secular demand, cyclical demand indicators remain weak, especially from traditional sources in China (infrastructure and construction). Historically, the rally in spot copper to a record high and +30% year-on-year would be consistent with robust global growth (chart 1). However, supply side factors and financial speculation are more plausible explanations for the recent impulsive rally in the copper price.


From a secular demand perspective, copper is critical for energy transition, electric vehicles, and related industries (semiconductors). While the physical market deficit and constrained supply are well appreciated, there is simply not enough deposits/discoveries (copper mines and output) to meet all the projected future consumption demand from the industries noted above. In the short term, exchange inventory is also extremely low (chart 2). 

Chart 2

Moreover, there was a large dislocation in the copper price benchmark last week between the COMEX and LME last week. A large spread is rare and usually short-lived as physical flows adjust. Usually, a large COMEX copper premium would attract more metal into its US warehouses. However, this is proving more difficult than expected, with generally low copper inventory, as well as challenges getting it to the US. According to Morgan Stanley, “another reason COMEX copper traded so high above other benchmarks was the lack of deliverable metal – only 17% of metal in LME warehouses is from a country which has brands approved for COMEX delivery, meaning most of the easily available inventory cannot be used.”*

Copper’s medium term demand fundamentals appear strong. However, we are not convinced that the impulsive rally this year necessarily implies a strong cyclical recovery in global growth. While China’s demand indicators in sectors other than property look robust, the credit impulse (a leading indicator of real estate and construction) remains extremely weak in this cycle (chart 3). The new industries (energy transition and electric vehicles) are also export orientated and face potential trade measures from the EU and United States.

Tactically, copper is trading near the record high and the major copper producers have rallied over 45% year to date. We are bullish on the medium-term fundamentals and hold some of the Australian miners. However, we would be cautious adding more exposure here. Rather we would prefer to add on a correction.

Chart 3

20240527_Dr. Feelgood (Copper)
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