Viewpoint: Copper volatility, uncertainty on tap in '23

Copper market volatility will likely persist into 2023 because of uncertainty over Covid-19 protocols in key consumer China, high inflation and rising interest rates, and challenging near-term demand outlooks.

Market participants surveyed by Argus expect global copper prices to remain elevated but volatile into early 2023 amid the myriad of ongoing issues.

Macroeconomic uncertainty

Inflation that surged midyear to four-decade highs in the US is undermining economic growth, and remains top of mind for participants in the country.

The Federal Reserve has reiterated its laser focus on quashing inflation, signaling more rate hikes are in store for next year but at a greatly reduced pace from this year as it aims to avoid pushing the economy into recession with its monetary tightening. The consumer price index (CPI) eased to an annual 7.1pc in November, a fifth month of declines from a peak of 9.1pc in June, a four-decade high. Even amid signs of easing price pressures, market participants still expect the reduced purchasing power of consumers to eat into outright copper demand.

China, the world's leading copper consumer, has dropped its strict Zero-Covid-19 strategy that had prompted protests across the country, a potential boon to demand. But it has not offered a coherent replacement to the strict lockdown approach, which may lead to further Covid-19 outbreaks.

The opening up could benefit China's construction sector, which accounted for 28pc of total global copper end-use in 2021, according to the International Copper Study Group.

The dollar hit a 20-year high in September and experts forecast it will remain strong in 2023, potentially weighing on copper prices. As the dollar appreciates, demand tends to decline as foreign currency holders are forced to pay more for each pound of metal — the opposite is true as well. The US Dollar index, DXY, rose by 9pc to 105.03 on 12 December from a year earlier but was off from 2022 peaks of roughly 114.

Demand and supply

Market participants remained split on the direction of copper scrap supply and demand heading into 2023.

"Going into 2023 is going to be challenging" a dealer said. "The shortage of copper units is real and will continue. I don't see anything on the horizon that will change that. The spreads are tightening. The mills are having a tough time getting all their deliveries and dealers are having trouble filling their sold loads."

Others said tightening flows would not be a major concern.

"We are loaded with metal and turning down offers," a consumer said.

"We are full on material and do not look to need much at all for January," a second said.

Some participants surveyed by Argus also expected that any tailwind from China's reopening may already be baked into current exchange prices. The December Comex spot copper month averaged $3.83/lb as of 12 December, already up by 4pc from average November levels.

Market participants were confident that market volatility would persist into the coming year. The average day-on-day movement in the Comex spot month was 5.5¢/lb in 2022, over double the exchange's total 2.6¢/lb average — volatility which carried over from 2021.

Comex shot up 25.8¢/lb on 4 November, the most for the second half of the year while its largest one-day drop was 19.4¢/lb on 5 July. All of this follows an all-time outright spot Comex high of $4.929/lb on 4 March.

Stocks, outlooks

Reduced registered copper warehouse stockpiles may provide fundamental support to higher copper premiums and tight scrap spreads.

Some consumers were even looking into extending annual cathode contracts out by years, aiming to lock down metal to shield against potential supply shortages.

Elevated spot copper cathode premiums and minimal copper scrap spreads are anticipated to remain in the first half of 2023 as long as supply remains low and international pricing and demand does not lose any ground. Current copper cathode premiums were at an Argus record high of 9-12¢/lb on 12 December while US bare bright scrap discounts of 6-10¢/lb under March Comex are currently at its tightest since July 2020.

The copper market is expected to end 2022 with a 328,000 metric tonne (t) deficit this year, followed by a 155,000t surplus in 2023, according to the World Refined Copper Usage and Supply forecast from the International Copper Study Group.

Banker Goldman Sachs said copper prices will move to record highs in 2023 with increased demand and a supply shortage.

Market participants surveyed by Argus expected first quarter prices around current levels, but most have concerns of a big deficit down the road because of a lack of existing supply to meet growing demand for electric vehicles, power grids and green energy initiatives.

By Mike Hlafka