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The copper price is ticking up, but is there strength in depth in the recovery?

The copper price seems to be on the turn, but how sustainable is the upside?

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Has the copper price finally bottomed out? The answer depends, of course, on how long your timeframe is.

But the early signs in 2020 are that the general downward trend in price that began in the summer of 2018, and which took most analysts by surprise, may be over.

Funds have been holding a net long position on the CME copper contract since the beginning of this year, the first time they have been collectively bullish since April 2019.

It’s a bullishness that began to show through in the price towards the end of last year, particularly after sentiment turned positive in regards to the outcome of the US-China trade talks.

But it’s not just sentiment about the future that’s at work here. In the first nine months of 2019 supply fell by 0.4%, and LME and Shanghai stocks are at their lowest since 2014. Stocks in the LME stood at 130,000 tonnes at the close on 12 January, down by 38.6% from 208,525 tonnes at the end of November, while on-warrant material fell to 98,625 tonnes from 120,000 tonnes.

And in the background, the wider macroeconomic outlook continues to mitigate in copper’s favour. Copper is widely recognised as the bellwether for the global economy, and optimism on that score has been driven by signs of rapprochement between the US and China and even - in the run up to Davos - between the US and France.

Longer-term, the market is also looking ahead to the likely increased use of copper in renewable technologies like electric vehicles and wind turbines.

All told, the bull case on the demand side has not been hard to make. Debate rages amongst analysts, though, about whether supply will outstrip demand in 2020. If it does, then the renewed positive sentiment that we are currently seeing may be dampened down somewhat. For now though, the price is moving back up towards the US$3.00 mark, and some companies, particularly those in production are already making hay.

Copper production from BHP (LON:BHP), one of the world’s largest producer of the metal, rose 6% to 455,000 tonnes in the December quarter, boosted by increased volumes at the famous Escondida mine in Chile and at Olympic Dam in Australia.

The company said that recent unrest in Chile was unlikely to impact output, even though the wider effect on the Chilean economy is likely to run to billions of dollars.

For the full 2020 financial year BHP continues to expect production at between 1.7mln and 1.82 mln tonnes.

A clearer proxy for copper, though, is Antofagasta (LON:ANTO), which also operates in Chile, but which, aside from the usual copper by-products, isn’t focussed on other major commodities in the way BHP is. Shares in Antofagasta have risen from a six month low of 791p, hit in August of last year, to the current price of 950.8p. That’s not quite in the realms of the five-year high hit in June 2018, before the most recent bout of negativity set in, but it’s beginning to approach the foothills.

Another copper proxy, Central Asia Metals (LON:CAML), which now also has some zinc, also hit its five month high in mid-2018, traded rapidly down after that, hit a three year low in August 2019 at the same time Antofagasta was on the buffers, and has been on the path to recovery ever since.

CAML’s current share price is still some way off the heights that were reached in the economic optimism that pertained following President Trump’s election, but aside from that spike, the current 220p is better than any price since between the company’s inception and November 2016.

Just how much strength in depth there is to all this remains to be seen. The balance of supply and demand will remain crucial throughout 2020 in setting copper prices. But with Mr Trump in an election year, it’s unlikely that the US will be digging its heels in on trade in a way that generates negative headlines. Expect more positivity to come out of Davos, and more cautious optimism in the market about copper.

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Market Cap: £79.38 billion


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