By Rodrigo Scolaro
After a sharp decline in the first quarter, copper has become the star of the metals and reached its highest price in two years in July. Previously driven by the drop in production caused by the Covid-19 pandemic that forced companies around the world to slow down, the rise in price has not been reflected in the recovery of Chilean production in recent months, which suggests that it may have benefited from the recent weakness of the US dollar.
Copper metal prices rose 3,5% to $US6.633 a tonne in the London Metal Exchange’s (LME) opening week of July – a significant jump from a low of $US4.320 a tonne in mid-March. Commodity experts expect the price to continue rising over the next 18 months.
The positive result is also due to optimism in Chinese financial markets, where local stock gains are outpacing the rise in all global markets. Higher prices will benefit mining companies such as Freeport-McMoRan, the largest listed copper company.
Another factor driving prices is the intensity of copper use in electric vehicles, the use of renewable energy and other initiatives aimed at reducing carbon emissions from the transportation and electricity generation industries, mainly in European Union countries, which results in a growing demand for the metal.
Mining companies cautious about recovery
Despite the beginning of the relaxation of the isolation and health precautions imposed by the pandemic, Chilean state-owned Codelco, the world’s largest copper producer, has taken a cautious approach to resuming its major development projects, which were suspended in order to protect its workers. One of the projects that could be resumed soon is the Chuquicamata underground project, although it is not expected to have a full workforce until January.
Even with the resumption of projects, considered crucial for the Chilean state-owned company to maintain its production capacity and, thus, alleviate market concerns about possible supply cuts, the partial shutdown during the pandemic could have serious consequences for the company.
With decades of underinvestment, Codelco will need to spend more than $40 billion over the next decade just to maintain production. Cochilco, the government’s copper agency, has announced that Chile’s copper output is expected to fall 1,2% in 2020.
Another company operating in Chile, Canadian Teck Resources, was equally cautious when starting expansion work at its Quebrada Blanca mine.
Pandemic causes confusing market behavior
It is no surprise that the price of copper has fluctuated so much since the first quarter, during the Covid-19 pandemic, since it is one of the commodities most sensitive to economic conditions. The market was surprised by the rise in the prices of gold and silver, which originally behave in the opposite way to copper. In other words, when one falls, the others rise, and vice versa.
Gold, which fell slightly at the start of the pandemic, has risen 30% since the end of March, and silver, which fell 34% in Q1, has since risen a whopping 98%. This may reflect confusion and divisions among investors about the likely course of the virus and its economic and market impacts.
The rise in copper prices is initially explained by the incidence of the coronavirus in Chile and Peru, which together produce around 40 percent of the world's copper, affecting supply. As China appears to be emerging more quickly than the rest of the world from the economic effects of the pandemic, demand continues to rise.
The trajectory of gold and silver prices may mean that precious metals investors are not as confident that the pandemic will end as soon or as smoothly as equity investors seem to believe, as gold has traditionally been a safe haven investment in volatile and threatening times, which fits the description of a pandemic. On top of the health crisis and its economic implications, there is also the escalating tensions between the world’s two largest economies, the US and China.