The markets are currently struggling with a global copper shortage, driven by broken supply streams and higher demand pressures as China reopens and the push toward electrification continues.
One primary factor behind this shortage are ongoing protests in Peru, which has been facing unrest ever since former President Pedro Castillo was impeached last December. Peru, which accounts for 10% of the global copper supply, has been pushed to a near-standstill in recent months as the disruption continues.
Meanwhile, Chile, the largest copper producer in the world with 27% of global supply, chalked up a year-on-year decline of 7% last November.
When you combine this with plans worldwide to massively ramp up the production of electric vehicles and their related charging stations, it's easy to see how a copper squeeze occurs.
Some analysts are seeing this as more than a flash-in-the-pan issue. "We're already forecasting major deficits in copper to 2030," Robin Griffin, Wood Mackenzie's Vice President of Metals and Mining, told CNBC in February.
But what does this mean for the price of copper? Interestingly, since the beginning of the year, we've seen a steep rise and then a steady fall, resulting in copper prices remaining relatively flat year-to-date.
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Clearly, there are competing pressures on the metal. For one thing, so far, the economic rebound for China, which consumes 52% of the world's copper, has been less dramatic than expected. With an economic growth target of around 5% for 2023, we're seeing fewer ambitious goals from the country than in previous years. At the same time, construction spending in the U.S. has declined by $1.8 billion—that's a serious contraction of an industry that accounts for 46% of copper demand in the U.S.
As South American supply eventually (possibly) comes online, and stranded assets in the Democratic Republic of the Congo begin exporting their stores of copper once again (eventually), we may end up facing less of a shortage than headlines may suggest.
All in all, it's a conflicting story with many moving pieces. Goldman Sachs predicts copper will hit record levels in 2023, while CIBC expects a recession to hamper anticipated demand.
Our take is that the long-term view for copper remains bullish, but investors must be careful of a potential recession and further market contractions in the space in the short term.
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Inflation could continue above the U.S.'s two-percent target for a long time, making holding real assets like gold and silver ever more attractive as a hedge against lower purchasing power.
