Market Minute: Copper Hitting the Second Wave in the Cycle
For the casual observer, copper markets typically serve as a gauge for economic growth. Rightfully so, as copper has historically been a reliable indicator of global expansion, particularly when demand from China rises. In 2022, China accounted for over 55% of global copper consumption. However, recent consumption trends have slowed as China's real estate sector undergoes its own economic adjustments. The recent upward movement in copper prices over the past month, though, has more to do with global tariff policies and copper's physical market repatriation cycle.
Copper ore, the mineral containing copper concentrate, has experienced supply shortages in recent years. Factors contributing to these shortages include labor disputes at high-production mines in Central and South America, export constraints, and uncertainties surrounding export licenses from Indonesia. Many of these labor-related issues, such as last year's strike at BHP’s significant Escondida mine—which alone accounts for roughly 5% of global supply—have been resolved in the short term. Additionally, export licenses have now been granted to Freeport Indonesia, a joint venture between Freeport-McMoRan (FCX) and the Indonesian government, which will introduce further supply into the physical market. So, what has prompted the recent surge in prices?
Similar to trends observed in the gold market, copper is undergoing repatriation from Europe to the United States. Physical traders are attempting to preempt the effects of upcoming tariffs on the broader metals market. Over the past month, stockpiles at the London Metal Exchange have dropped by more than 15%, with an estimated 110,000 tons still awaiting delivery to the U.S. Concurrently, COMEX copper warehouse stocks have reached their highest level since January 2019. This physical transfer has created a unique short-squeeze scenario, leading market participants to question whether producers will increase hedging activities once the situation stabilizes.
From a technical perspective, copper prices are nearing resistance at $5.20 per pound and could be considered technically overbought given the current fundamental conditions. The first support level is around $4.80 per pound. Should there be a more significant correction, the $4.00 level has historically been an area of strong value over the past year.
Currently, the price action in copper remains mechanically driven. As the market gains greater clarity on tariff policies, copper prices will respond accordingly. Given that copper consumption hasn't experienced significant growth recently, relying on copper as a gauge for global economic expansion could be misleading for the time being.
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Charles Schwab and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions.
