Supply worries drive copper price to 14-month high

by David Fleschen

Regardless of the higher risk aversion of investors in the financial markets, the LME Industrial Metals Index rose yesterday to almost 2,800 points, the highest level since January. Above all the rise in the price of copper to a temporary $6,360 per tonne, or the highest level since May 2019, is also driving the index up for other metals, as copper is often seen as the "lead wolf" among the industrial metals and a leading economic indicator. However, the price rise this time is not primarily due to higher demand or its expectation, but to concerns on the supply side. The two largest copper mining countries in the world, Chile and Peru, each have over 300 thousand Covid-19 infections, which means that they now have more corona cases than Great Britain and any country in the EU. In addition, more than 3,000 new cases are added every day. Chile, the largest producer, has not yet managed to close down all its mines. But this danger exists, and the loss of thousands of mine workers alone is likely to make production more difficult.

This is probably also the reason why, after the two-month forced break in March-April, mine production in Peru will probably not return to its pre-crisis level this month as expected. In Chile, the danger of strikes in the wake of higher wage demands is an aggravating factor. The shortage of supply of copper concentrates in Peru and Chile should reduce total production. According to SMM, this is probably the reason why Chinese copper production (refinery, cathode) fell by 1.4% in June compared with the previous month to 759.2 thousand tonnes. Available (i.e. on-warrant) copper inventories on the LME continued their downward trend, falling by a further 4,000 tonnes to 94,800 tonnes, the lowest level since January. Due to the supply shortage, the spot price on the LME is now trading with the highest premium over the 3-month forward since April 2019. In the last 14 months, with one exception, it has always traded at a discount, i.e. the forward curve was in contango.

Source: Commerzbank Research, Photo: Fotolia

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