Copper price decline signals uncertain outlook for 2024

A strengthening dollar, increased warehouse inventories, and uncertainty around China’s economic growth trajectory led to a decline in copper metal prices on the London Metal Exchange (LME) in Monday’s session.

The red metal was down 1.5% for the day to $8,484 a metric tonne, falling below the psychologically important $8,500 mark.

The reversal comes shortly after copper climbed to a 4-month high and registered a 4.4% growth in price during November 2023, marking the first positive month since July.

The bullish trend was powered by stimulus measures by the Chinese government and expectations of the Fed reducing policy rates.

However, prices moved lower with the dollar index (DXY) recovering and heading towards 103.6 – 103.8 levels, after having slipped into 102 levels in November 2023.

The dollar and copper metal are usually inversely related given that major commodities are priced in dollars.

Due to the high-interest rate environment, demand destruction throughout the year has meant that LME inventories have risen more than 3-fold from above 50,000 tonnes in July 2023 to 174,900 tonnes at the Friday close.

Since, Doctor Copper as it is known, is widely viewed as a gauge of macroeconomic health, the dip in price and inventory build-up is raising concerns about the wider economic picture.

Bullish factors

Moving ahead, mine closures, often due to widespread protests, operational challenges, or falling ore quality in large producing countries such as Chile and Peru are threatening to reduce global output, thereby tightening the market.

In addition, a strong 25% projected growth in the Chinese EV market in the following year, as well as broader green electrification projects, should drive higher copper consumption.

Bearish factors

As a major consumer of copper, China's domestic economic data this year has not been as encouraging as expected after the lifting of public health restrictions.

Despite the government rolling out stimulus measures, the severe risks faced by the gigantic property sector, of which Evergrande is a key piece, continue to add to the gloomy outlook.

Data from the National Bureau of Statistics (NBS) confirms that new house construction is down almost by a quarter on an annualized basis.

Unless resolved, this will likely keep demand for the red metal subdued.

ING Research notes that downstream treatment charges and refining fees have declined for the first time in three years, and are,

In addition, China, and other countries such as India and Indonesia are seeing a boom in domestic refining capacity, which is likely to lead to a build-up of the refined metal in 2024, slowing demand from major producers.

This is especially significant since the same study notes that,

The International Copper Study Group forecasts excessive supplies of 467,000 tonnes of refined metal in 2024, versus a modest deficit in 2023.

Outlook

2023 has not been a happy year for copper with prices declining more than 10% YTD in light of rate hikes and monetary policies.

The difficulty in gauging the outlook for copper comes primarily from the uncertainty around China’s industrial growth prospects and uneven consumer appetite.

Having said that, Caixin PMI figures released earlier today were the cause of some cheer, as the composite index broke through 50 after having contracted in the previous month.

Potential price points

Analysts at ING Research forecast average prices of $8,450 per tonne in 2024, and do not anticipate a recovery until at least Q2, when rate cuts are expected to become operational.

The recent high of $8,640 per tonne is likely to provide resistance if prices do begin to recover.

Credit rating agency Fitch projects copper prices to trade around $8,600 per tonne at the end of 2024.

However, the long-term outlook is still positive given the need for copper in the energy transition, as well as its use in EVs and other green technology.

It should be noted that the International Monetary Fund (IMF) forecasts global growth to slow from 3.5% in 2022 to 3.0% in 2023 and to moderate further to 2.9% in 2024.

The IMF notes that this is well below an average of 3.8% YoY from 2000 to 2019.

In China, specifically, growth is projected at 3.0%, 5.0% and 4.2% for 2022, 2023 and 2024, respectively.

It remains to be seen if Chinese growth can match forecasts given that even more fiscal stimulus is expected to be rolled out next year.

At the time of writing, the copper continuous contract on NYMEX is trading 1.13% down on the day.

In 2024, the direction of copper prices will depend on how major macroeconomic developments unfold, particularly in regard to the pace of Fed cuts, China’s economic recovery, and dollar strength.