There’s Not Enough Copper for a Green Wave (similar article appeared in Pr*active Investors US & UK overnight)
The broking house Jefferies has raised its copper price forecasts, which it runs on three different scenarios: a base case, a bull case for renewables, and a bear case.
In all three scenarios the price looks set to peak during 2026: under the base scenario at US$4.50 per pound, under the bull scenario at US$5.00, and under the bear scenario at US$3.75 per pound.
Copper futures (Dec'20) are currently US$3.31 per pound.
“If our assumptions are correct, the squeeze higher in copper is a question of 'when' rather than 'if',” says Jefferies.
As a natural knock-on effect, Jefferies predicts that higher prices will incentivise investment in new mine capacity.
“The price at which the demand elasticity is great enough to balance the market depends on the magnitude of the implied deficits, but in our base and bull case scenariosit is not unreasonable to assume the copper price would rise to at least US$5.00 per pound for an extended period before demand would adjust enough to balance the market. This point is very much underappreciated in our view,” say the analysts from Jefferies.
Apparently, there is an interesting slide midway through the Jefferies analysis (I cannot locate the relevant slide pack), with the broker listing all the countries that have pledged or legislated for a carbon neutral future. The list apparently includes all the world’s major economies except the USA, and even two countries that have already reached carbon neutrality, Suriname and Bhutan.
In broad brush terms, funds are still holding historically high levels of long positions with outright shorts continuing to run at very subdued levels.
Money managers have flipped from collective net short of 19,000 contracts in March to a current net long of 38,000 contracts.
There is little doubt that however good the fundamental optics, copper has been consumed into a bigger reflation trade predicated on the proliferation of COVID-19 vaccines and the high hopes resting on incoming president Joe Biden and his promised “green” stimulus package.
Bring on 2021
Cheers
These are only my thoughts and it does not constitute investment advice. Before acting on any information you read and before making any financial or investment decisions, you should always consult your advisor(s) or other relevant professional experts.
(20min delay)