Copper topped $8,000 a ton for the first time in more than seven years, pointing to the start of a new commodities super-cycle as supply-side investment falls short of an expected surge in demand.
The market is witnessing the sharpest rally in more than a decade, with China’s appetite for commodities and supply snags in the early stages of the pandemic lifting copper about 80 per cent from its March lows. Expectations for a deficit, the weaker dollar, and its role in green technology have also fuelled gains. Some banks are now drawing comparisons to the spike in the early 2000s, when a jump in Chinese orders ushered in the last super-cycle for commodities.
“You have all the tell-tale signs of a super-cycle,” Jeff Currie, head of commodities research at Goldman Sachs Group, told Bloomberg TV. He cited metals hitting multiyear highs, the weaker dollar, crude oil reaching $50, and rising global liquidity.
Copper rose as much as 1.4 per cent to $8,028 a tonne on the London Metal Exchange, the highest price since 2013, and traded at $7,993 at 2:26 p.m. in Shanghai. Other metals also gained, with aluminium rising 1.2 per cent and zinc up 0.8 per cent.
Goldman pointed to the start of a positive feedback loop between commodities, the dollar and emerging-market growth that has driven past structural bull markets. At the centre is strong, synchronised, policy-driven demand focused on wealth redistribution and renewables and, with commodity supply side capex outside of renewables still at very low levels, this demand growth should keep markets tight for the foreseeable future, it said in a December 17 note.
China’s relative success at containing the coronavirus pandemic and optimism about global economic growth next year as vaccines are rolled out is fuelling gains across industrial commodities from iron ore to oil. It’s been a remarkable turnaround for copper, which fell more than 50 per cent from a record high in 2011, trading below $5,000 a tonne during a slump in 2015-16 and again earlier this year.
Copper also benefits from more specific factors that make it attractive to long-term investors. While many expect oil prices to rebound in the short-term as the world begins returning to normal, there’s more doubt about its long-term outlook as the energy transition gathers pace. Copper, on the other hand, is likely to benefit from the shift because of its use in electrical wiring.
In the short term, copper is getting a boost from tight supplies and strong demand. Top consumer China churned out a record volume last month, pointing to resilient consumption as the country emerges from the pandemic. Among signs of tightness, stockpiles tracked by top exchanges including the LME have slumped to a six-year low.
Cooling Warning
Adding to this week’s gains is a brighter outlook for consumption outside China. US lawmakers are pressing to finalise a spending deal, and the Federal Reserve this week strengthened its commitment to supporting the world’s largest economy. A bipartisan fiscal pact “appears to be close at hand,” Senate majority leader Mitch McConnell said, but it will probably require work over the weekend to pass Congress.
Still, copper’s surge may be at risk of cooling. Citigroup warned earlier this month that the metal was “too hot to handle” following a recent rally, and that prices may retrace if gains aren’t supported by the physical market.
“Investors are probably already currently pricing in the broader, deeper and strong 2021 economic recovery,” Fitch Solutions said in a note. “This increases the risk that prices could struggle to hold such gains later in 2021.”
On the technical side, LME copper’s 14-day relative-strength index was at 77 on Friday and has largely remained in overbought territory for three weeks even as prices continued to rise.
