Copper Is Flashing a Recession Warning

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COMMODITIES

Copper Is Flashing a Recession

Warning

By Myra P. Saefong

Updated July 7, 2022 8:31 am ET / Original

July 7, 2022 2:30 am ET

Copper prices had their biggest quarterly percentage decline in more

than a decade.
Scott Olson/Getty Images

Copper prices saw their biggest quarterly percentage

decline in more than a decade and trade at their lowest
level since November 2020. But the metal may still
have room to fall before its role in renewable energy
provides long-term support.

“The present day focus in copper is all about expected

demand destruction from recessionary forces,” says
John Caruso, senior asset manager at RJO Futures.
However, with the recent plunge in prices, “the
question turns towards value.”

Copper is seen as an economic bellwether because the

metal is used in many applications and products
including construction, household appliances, and
electric vehicles. Falling prices may indicate a sour
outlook as fears mount over a global economic
slowdown.

Copper futures HG00 –1.46% for September

delivery on Comex settled at $3.408 a pound on
Wednesday, the lowest most-active contract finish
since November 2020. They posted a decline of nearly
22% in the second quarter, the largest quarterly
percentage loss since the third quarter of 2011.

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The disruption in the energy markets due to the war in

Ukraine has “reprioritized matters,” away from a focus
on copper’s role in greener technologies and climate
commitment, as policy makers scramble to have
energy needs met, says Bernard Drury, president and
chief executive officer of hedge fund and alternative
investment firm Drury Capital. “This tempering has
mitigated the perceived need for massive new supplies
of copper in the years ahead,” contributing to copper’s
recent decline.

The copper market is also attuned to the Federal

Reserve interest-rate hikes, rising inventories, and the
“specter” of recession, says Drury.

Still, the metal had seen strong price increases in both

2020 and 2021, with global supplies of copper “very
challenged,” while demand continued to grow, says
Matthew Fine, portfolio manager of the Third Avenue
Value Strategy portfolios. That, combined with the
realization that “renewable energy technology is
extremely copper intensive, conspired to push prices
upward.”

Recessionary worries have taken hold this year, as

“strict lockdowns in China and the potential impact on
economic activity by the largest consumer of copper”
exacerbate traders’ eagerness to “de-risk,” Fine says, as
they avoid exposure to the industrial metal, which
could see demand decline. Still, it’s reasonable to see
that as a “temporary phenomenon.”

Copper prices hit a record high in March, but have

​plummeted in the past month.
$5.25 per pound

5.00

4.75

4.50

4.25

4.00

3.75

3.50

3.25
2022 July
As of July 8, 4:59 p.m. ET
Note: Continuous futures contract.
Source: FactSet.

He says he would not emphasize what’s happened

over the last couple of years, or in 2022—and instead
points out that global copper consumption continues
to rise, and has grown by more than 3% a year for the
last 120 years, on average. “There is little prospect for
supply keeping up with that demand growth over the
coming several years,” says Fine.

Copper prices saw an impressive jump in prices from

intraday lows just below $2 a pound on Comex in April
2020 to highs above $5 in March of this year. That’s a
two-year rally of roughly 150%. While the market has
retraced a little more than 50% of that rally, it “may still
have some work to do on the downside before we can
actually say we’ve established a bottom or ‘value’” in
copper, says RJO Futures’ Caruso.

Even so, the market may be “closing in on levels where

longer-term investors could see value in price,” he says.
Based on technical analysis, he sees $3.17 a pound as
a “big level” for copper traders, investors and bargain
hunters.

That’s the price where “you could begin to see

insatiable demand for the red metal,” says Caruso.
“After all, due to its effective conductive properties,
copper may soon become the ‘new oil’.”

Goldman Sachs Group referred to copper as the “new

oil” in a research note dated April 13, 2021,
emphasizing the metal’s critical role in achieving the
Paris climate goals. “Discussions of peak oil demand
overlook the fact that without a surge in the use of
copper and other key metals, the substitution of
renewables for oil will not happen,” analysts at
Goldman wrote.

For the near to intermediate term, however, Caruso

says he’s not bullish on copper because there are “still
many unanswered questions around…the severity of a
potential global recession in coming months.”

Write to editors@barrons.com

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Chris Kasmarzyk · 1d ago

"The disruption in the energy markets due to the
war in Ukraine "

While somewhat true, oil prices climbed 66%

between the time Biden took office up to when
Russia decided to go to war with Ukraine. The whole
"Putin price hike" narrative is ...See more (Edited)
Reply 14 8

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