All That Glitters Is Now Not Copper

Those who followed recommendations to bet heavily in copper plays over the last two years have been handsomely rewarded. Since the move began, Freeport McMoRan (FCX), the top copper producer in the world, has more than doubled.

The logic was very simple. Booming EV sales and the needed tripling of the electrical grid assured that supplies would be challenged for years to come.

The closure of one of the world’s largest copper supplies in Panama last year after a court ruling further exacerbated supplies.

When Chinese speculators targeted copper it was really off to the races.

The red metal has been on a tear since February, picking up some 40%. Similarly, Freeport McMoRan (FCX), the top copper producer in the world, has risen by 55%, and (COPX) has jumped by 67%. That caused the long position on the London Metals Exchange to grow from around 5,300 contracts in January to a high of 71,900 contracts in mid-May

But copper has been sagging of late, ever since (FCX) hit an all-time high of $56 in May. Some of this might be due to normal profit-taking in an asset class that has had a tremendous run. As with many assets since October, things have been too good for too long.

But there may be larger factors at play.

For a start, the much hoped-for Chinese economic recovery never took place. Chinese constriction demand for copper is still at rock bottom, with home prices off 70% and bankruptcies rippling through the system.

And through my own research, I discovered that AT&T has begun scrapping its copper landline system in favor of far cheaper and more efficient fiber optic cable and cellular networks. If (T) were smart enough to take advantage of this, it could unleash as much as a year's supply of scrap copper on the market.

An effort by BHP to take over Anglo America, another big copper producer, fell apart.

If the Panama mine were to reopen in early 2025, that would tip the market from a shortage into a surplus.

Trend following Commodity Trading Advisors have flipped from bullish to bearish putting further pressure on the market.

As a result, the copper market has temporarily come into balance. This could last some months.

Eventually, the shortage will come to the fore once again as the long-term fundamentals are so overwhelming.

Although the market was in a surplus for the first four months of the year, analysts say that will soon change. Copper demand is expected to exceed supply this year and a deficit of around 600,000 metric tons over the next three years is possible. Other forecasts see a shortfall approaching half a million metric tons in 2024 alone.

The bottom line here is that Mr. Copper is not dead, just resting. I’ll let you know when the wake-up call sounds.