Copper prices fell despite strong fundamentals—caution against optimism

Experts predict that due to supply shortages, copper prices will rise, but concerns about an economic recession continue to weigh down the prices.

In May this year, when copper prices soared to a historic high of over $11,000 per ton, some investors boldly predicted that it could break the $20,000 per ton mark. Bullish investors emphasized that this critical metal is facing a global shortage, and with the energy transition and the surge in data center demand driven by artificial intelligence, the demand for copper will significantly increase. Investment funds and traders generally believe that supply shortages will exert long-term upward pressure on copper prices.

Stanley Druckenmiller, a renowned investor, is among the voices optimistic about copper prices. In an interview, he pointed out that considering copper's extensive use in electric vehicles and communication networks, the supply and demand situation over the next five to six years will be very challenging.

However, just a few months later, despite the underlying factors supporting the bull market remaining largely unchanged, copper prices have fallen by 20%.

Meanwhile, despite the expected structural growth in global copper demand, the world's largest copper producers have been lowering their production forecasts.

Recently, concerns about an impending recession have further exacerbated the decline in copper prices and other commodities.

However, factors affecting copper prices go far beyond supply and demand relations.

Alexandra Symeonidi, an analyst at William Blair, points out that the copper market's complexity far exceeds simple demand and supply dynamics.

She first mentioned that high copper prices typically suppress demand in the Asian market, a key region for copper consumption. High prices often dampen the purchasing interest of Asian countries in the short term.

Symeonidi also emphasized that unlike stock prices, which are usually based on long-term expectations, commodity prices more frequently reflect the current supply and demand situation. She stated, “Although the market is somewhat influenced by expectations, we also clearly see that the market is likely to tighten later this year, potentially continuing until 2025.”

This is one of the reasons supporting the bullish argument for copper prices: the expected supply-demand imbalance is projected to extend well beyond 2025.

Symeonidi said, “If we look at the current supply and demand situation and take into account future expectations for the next 10 years, the market indeed appears very short.”

However, she also explained that investors might be underestimating the potential impact of new technologies. These technologies could reduce the intensity of copper demand, encourage the emergence of copper substitutes, and impact copper recyclability.

Symeonidi pointed out, “In many future applications, there may be technologies with lower copper densities. For example, as we have seen in electric vehicle battery technology, advancements may reduce reliance on cobalt.” Cobalt is a key component in smartphone and electric vehicle batteries, whose price soared in 2018 and subsequently plummeted, yet to recover to historical highs.

Moreover, unlike cobalt, copper can be replaced by a cheaper and more readily available metal—aluminum—in many applications.

Symeonidi specifically highlighted that in the field of wiring, aluminum can often replace copper because, despite its conductivity being about 60% of copper, aluminum is lighter (a benefit for electric vehicles).

Finally, copper recyclability is also an important factor. Currently, about 20% of copper comes from recycled metal, which further influences the market dynamics.

Symeonidi stated that if copper prices continue to rise, it would stimulate the recycling industry's enthusiasm.

While currently, some countries' scrap copper recycling is subject to regulatory restrictions, and the supply chain supporting large-scale recycling is not yet mature, Symeonidi believes that higher copper prices in the long run will gradually alleviate these obstacles. In fact, before investors see scrap copper as a reliable supply source, the entire supply chain needs further development. However, she is confident that rising copper prices will incentivize investors to accelerate this process.