The price of copper has fallen to its lowest level in more than four months. Daniel Ghali, Senior Commodity Strategist with TD Securities, speaks with Greg Bonnell about the outlook for prices and concerns about rising copper inventories.
Print Transcript
You may have heard of Dr. Copper. It's called that because of the metal's perceived ability to diagnose the health of the economy. Well, copper prices have been falling. Inventories appear to be facing their largest surplus in years.
So what does this tell us about the state of the economy? Daniel Galley, senior commodities strategist with TD securities, is here to prescribe some knowledge for us. We're talking Dr. Copper, prescriptions, we got all our terms in order here. What is what is happening right now?
Yeah, thanks for having me on, Greg. So what is Dr. Copper telling us? I think it's actually signaling that storm clouds are building in the global economy. And I have to nuance that because the demand picture for copper has so many idiosyncratic stories that warrant mentioning. On the one hand, in China, the construction sector as we know has been going through a prolonged period of pain.
The construction sector is actually the largest individual end-use consumer of raw materials, copper is one of them. But the story there is that the targeted stimulus that the government has implemented over the last several months is improving the outlook for completions of construction. So while the pipeline of future construction from which the pipeline of future copper demand might flow from is stagnant, the completion rate has increased notably, and that supports copper demand today.
Elsewhere in the US, it's no surprise that goods consumption is on the decline. And that's been the case for a very long time. And the same is true in Europe. Those are some areas where we do see the impact of interest rates flowing through into demand.
All right, so we have a few things at play there in terms of copper. When we talk about the surplus that you see in the headlines, I believe you said there's idiosyncrasies here in the copper trade. There's some nuances in this space too, isn't there?
Yeah, absolutely. The biggest piece of the puzzle for copper analysts out there is that you had a substantial increase in mine supply, a substantial increase, particularly in China, in refined production, so that's smelted copper. China hasn't imported any less copper this year than last, but when you look at inventories on all the global exchanges, you can't see any sign of that buildup.
So if demand is really weak, supply has improved. You should expect to see a rise in inventories which we actually haven't. And some folks out there are suggesting that this implies that analysts have been very wrong on the consumption from renewable energy sectors, from electric vehicle sectors, which are some of the bright spots for copper demand as well. What we see, however, is potential evidence of substantial builds in inventories in invisible inventories.
Let's talk about visible inventories. In my head, it's someone going around with a clipboard actually checking, saying, how much copper do you have in that room? Let's jump over to the next place. Is this what we're talking about here, the physical copper in the world?
In some ways, yes. So the exchanges in physical commodities are typically seen as the market of last resort, meaning that a trader would only deliver metal or take out metal from there as a last resort because the fees associated with parking your metal there are expensive. You also have, however, these commodities are consumed by real industries.
People talk about Dr. Copper because copper is used in almost everything that we have in the global economy. So while you have inventories on the exchange and that's what is visible for analysts and traders in the world, you also have inventories at commercial sites. Fabricators, the smelters themselves, those who are producing it have work in progress inventories. And that's one of the explanations we see of where that missing copper actually is.
And where is it actually? Let's talk about China a little bit too. The economy disappointing. We know there are huge consumers of commodities. Do they have the copper?
We do think a big chunk of that missing copper is located in China. So we spoke a little bit about how they haven't decreased their inventories, their production of refined copper has come up substantially. The demand side from the construction sector has been pretty weak.
So where is that missing copper? Part of the explanation of that might be that because the refined production has increased, these new smelters, the new capacity at smelters, actually need work-in-progress inventories. So that might be where part of the largest surplus in years is actually located. The other explanation is that you've had an increasing trend of these producers trading directly with manufacturers. So they have some refined copper that they would sell directly to a fabricator of some end-use product.
I want to ask you in the end what it could all mean for copper prices, but the one more piece of the puzzle, China's economy. Obviously, we entered this year with China dropping its COVID restrictions across a number of asset classes, across a number of commodities. People said, it's game back on.
The world's second largest economy opening for business. Hasn't played out that way. What kind of effect is it having on copper?
No, absolutely it hasn't played out that way. And I'd say earlier this year, the optimism surrounding China's reopening and the subsequent optimism surrounding the stimulus in China was behind the rise in copper prices. The copper prices today don't seem to be reflecting the supply-demand balance that we're forecasting and that a lot of the statistical agencies out there have.
We're talking about the largest surplus in several years, and that surplus is actually likely to increase into next year. So what impact did China's economy have?
Well, the construction sector we've spoken about a little bit. You have some offsetting forces. Right now, the rise in completions is supporting copper demand. But looking a little bit further out, China's depended on the real estate sector for so long to grow their economy, and that is probably changed on a secular horizon such that we won't be able to depend on that sector for future copper demand growth.
Now, I know you don't have a crystal ball, or if you do, I'd love to get in on that. But, take all of this together, what could it mean for the price of copper and the near medium and longer terms?
Well, copper prices can come under a period of substantial weakness. We think that's the case, particularly in the short-term horizon. In the medium term and longer term horizon, however, that notion of a supercycle driven by the energy transition is really compelling. And in fact, it wouldn't be surprising that, over the longer term horizon, that the slump in copper prices that is likely in the short term appears as just a blip on a chart.
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You may have heard of Dr. Copper. It's called that because of the metal's perceived ability to diagnose the health of the economy. Well, copper prices have been falling. Inventories appear to be facing their largest surplus in years.
So what does this tell us about the state of the economy? Daniel Galley, senior commodities strategist with TD securities, is here to prescribe some knowledge for us. We're talking Dr. Copper, prescriptions, we got all our terms in order here. What is what is happening right now?
Yeah, thanks for having me on, Greg. So what is Dr. Copper telling us? I think it's actually signaling that storm clouds are building in the global economy. And I have to nuance that because the demand picture for copper has so many idiosyncratic stories that warrant mentioning. On the one hand, in China, the construction sector as we know has been going through a prolonged period of pain.
The construction sector is actually the largest individual end-use consumer of raw materials, copper is one of them. But the story there is that the targeted stimulus that the government has implemented over the last several months is improving the outlook for completions of construction. So while the pipeline of future construction from which the pipeline of future copper demand might flow from is stagnant, the completion rate has increased notably, and that supports copper demand today.
Elsewhere in the US, it's no surprise that goods consumption is on the decline. And that's been the case for a very long time. And the same is true in Europe. Those are some areas where we do see the impact of interest rates flowing through into demand.
All right, so we have a few things at play there in terms of copper. When we talk about the surplus that you see in the headlines, I believe you said there's idiosyncrasies here in the copper trade. There's some nuances in this space too, isn't there?
Yeah, absolutely. The biggest piece of the puzzle for copper analysts out there is that you had a substantial increase in mine supply, a substantial increase, particularly in China, in refined production, so that's smelted copper. China hasn't imported any less copper this year than last, but when you look at inventories on all the global exchanges, you can't see any sign of that buildup.
So if demand is really weak, supply has improved. You should expect to see a rise in inventories which we actually haven't. And some folks out there are suggesting that this implies that analysts have been very wrong on the consumption from renewable energy sectors, from electric vehicle sectors, which are some of the bright spots for copper demand as well. What we see, however, is potential evidence of substantial builds in inventories in invisible inventories.
Let's talk about visible inventories. In my head, it's someone going around with a clipboard actually checking, saying, how much copper do you have in that room? Let's jump over to the next place. Is this what we're talking about here, the physical copper in the world?
In some ways, yes. So the exchanges in physical commodities are typically seen as the market of last resort, meaning that a trader would only deliver metal or take out metal from there as a last resort because the fees associated with parking your metal there are expensive. You also have, however, these commodities are consumed by real industries.
People talk about Dr. Copper because copper is used in almost everything that we have in the global economy. So while you have inventories on the exchange and that's what is visible for analysts and traders in the world, you also have inventories at commercial sites. Fabricators, the smelters themselves, those who are producing it have work in progress inventories. And that's one of the explanations we see of where that missing copper actually is.
And where is it actually? Let's talk about China a little bit too. The economy disappointing. We know there are huge consumers of commodities. Do they have the copper?
We do think a big chunk of that missing copper is located in China. So we spoke a little bit about how they haven't decreased their inventories, their production of refined copper has come up substantially. The demand side from the construction sector has been pretty weak.
So where is that missing copper? Part of the explanation of that might be that because the refined production has increased, these new smelters, the new capacity at smelters, actually need work-in-progress inventories. So that might be where part of the largest surplus in years is actually located. The other explanation is that you've had an increasing trend of these producers trading directly with manufacturers. So they have some refined copper that they would sell directly to a fabricator of some end-use product.
I want to ask you in the end what it could all mean for copper prices, but the one more piece of the puzzle, China's economy. Obviously, we entered this year with China dropping its COVID restrictions across a number of asset classes, across a number of commodities. People said, it's game back on.
The world's second largest economy opening for business. Hasn't played out that way. What kind of effect is it having on copper?
No, absolutely it hasn't played out that way. And I'd say earlier this year, the optimism surrounding China's reopening and the subsequent optimism surrounding the stimulus in China was behind the rise in copper prices. The copper prices today don't seem to be reflecting the supply-demand balance that we're forecasting and that a lot of the statistical agencies out there have.
We're talking about the largest surplus in several years, and that surplus is actually likely to increase into next year. So what impact did China's economy have?
Well, the construction sector we've spoken about a little bit. You have some offsetting forces. Right now, the rise in completions is supporting copper demand. But looking a little bit further out, China's depended on the real estate sector for so long to grow their economy, and that is probably changed on a secular horizon such that we won't be able to depend on that sector for future copper demand growth.
Now, I know you don't have a crystal ball, or if you do, I'd love to get in on that. But, take all of this together, what could it mean for the price of copper and the near medium and longer terms?
Well, copper prices can come under a period of substantial weakness. We think that's the case, particularly in the short-term horizon. In the medium term and longer term horizon, however, that notion of a supercycle driven by the energy transition is really compelling. And in fact, it wouldn't be surprising that, over the longer term horizon, that the slump in copper prices that is likely in the short term appears as just a blip on a chart.
[MUSIC PLAYING]