It’s been rallying all year, but analysts at Benchmark Mineral Intelligence have a warning for copper bulls: beware the current build-up in US copper inventories.
The price of copper fell sharply at the end of last week as Reuters reported that the Trump White House remains unclear around US tariffs on refined copper.
Traders and other market participants have been shipping copper to the US at a record rate to get ahead of potential tariffs on the metal.
That’s pulling supply away from the rest of the world.
Source: Benchmark Mineral Intelligence
Albert Mackenzie, a copper analyst at Benchmark, says:
“This material has not been turned into anything yet, so the material could once again become part of price formation.
“The whole picture hinges on the next tariff update, and if the US makes a move that leads to a reduction in cathode flows to the US, the material that has turned the market into an artificial deficit could make the market artificially looser in future.”
This will be important for companies such as BHP Group (ASX:BHP) and Rio Tinto (ASX:RIO) because they are increasingly valued on copper exposure. Copper overtook iron ore as BHP’s largest earnings driver in its most recent result.
BHP produces around 2 million tonnes of copper per year and is the world’s largest copper producer.
Copper bulls too bullish?
Copper is now seen as a major beneficiary of the AI capital expenditure boom because of its use in data centres and electricity grids. That said, the dominant driver of copper use is still general economic growth and China.
David Tuckwell, chief investment officer at ETF Shares, says that data centres will probably only be about 5% of copper demand over the next three years.
Commodity investment firm Goehring & Rozencwajg is also warning that the copper boom may be overdone in the short term.
It wrote in its most recent quarterly letter:
“Today’s exchange stocks represent approximately 18 days of consumption. The only other recent periods that came close were 2013 and 2018, when inventories represented 16 and 14 days of consumption, respectively.”
The firm also pointed to weakness in Chinese copper demand. Unlike many market participants, Goehring & Rozencwajg expects copper to remain in surplus for the foreseeable future, despite recent supply disruptions from a variety of sources.
It does acknowledge that investor psychology is shifting, meaning the market may ‘look through’ bearish indicators for copper as the commodity bull market intensifies.
That could create a dynamic where investment capital continues to flow towards metals like copper, despite the fundamental supply and demand picture.
Write to Callum Newman at Mining.com.au
Images: Benchmark Minerals & Unsplash
