Copper at 7-year highs: Experts analyze whether there is a new “super cycle” and its impact on public finances

Copper closed yesterday on the verge of touching US $ 3.5 a pound on the London Metal Exchange, and experts on the matter foresee a “prolonged” period of upward pressure for the red metal.

It was on August 19 when the price of copper marked a milestone in the midst of the pandemic: after two years, for the first time it was positioned above US $ 3 a pound and since October 9 it has not fallen below that again. floor. Only in November, the value of the metal grew 14.6% and yesterday closed at around US $ 3.5 per pound -level not seen since 2013- on the London Metal Exchange, pulverizing all estimates regarding how it would behave in the end of this year.

For specialists, this is not an increase that will last for a couple of weeks or a few months, but they assure that the upward pressure – given by a set of factors on a global scale – would be maintained for a long period, which which recalls the so-called “super cycle” of copper that was experienced in the country some years ago, leading the metal to reach a historic US $ 4.6 per pound in February 2011 and, incidentally, significantly swell the fiscal wallet .

As Álvaro Merino, studies manager of the National Mining Society (Sonami) told Emol, “all the price projections for 2020 did not consider a copper value like the ones we are currently observing,” explaining that its strong rise is due to, fundamentally, to the rapid economic recovery that China has had – which captures more than 50% of world copper consumption. “The stimuli applied by China, in order to inject liquidity, tax cuts and investment in infrastructure have had a clear effect, since the Asian giant has grown faster than initially estimated,” he said.

Another factor, he continued, “is the depreciation of the dollar at the international level. The restriction in supply has also had an influence, due to stoppages of mining deposits in Peru, Mexico, Panama and Africa, particularly in the second and third quarters,” added to the “decrease in inventories” and “expectations of an early vaccine against covid. Along with the above, the increase in appetite for copper by investment funds stands out, which has driven the price”.

Meanwhile, Juan Carlos Guajardo, executive director of Plusmining, told this same media that “the stimulus plans that were introduced in the most developed economies are changing the macroeconomic context that is relevant for commodities, there is a lot of money in plans fiscal and also in monetary policy plans “. “This is translating into upward pressure on the price of some assets and commodities, at this time, are quite favored. In addition, there is an environment where a higher level of inflation is expected, when there are periods of high inflation, commodities tend to have a good performance. There is a trend towards a lower dollar, that is also helping and well, besides that, you have to have a behavior of the Chinese economy that has been very good, “he added.

Thus, Guajardo stressed, “for many years those of us who are analyzing the price of copper have been saying that the market foundations, that is, supply and demand were positive. And many of us talked a little in the desert because the price did not react, but now that these conditions are manifesting themselves, the very positive fundamentals that copper has are beginning to be a little more in evidence, and that will certainly support prices to remain at a good level. ”

While the academic and former director of the UC Mining Center, Gustavo Lagos, acknowledged that he expected the price of copper to culminate this 2020 at a lower price, and assured that the rise that has been seen is “the product of a lot of things : of how well China has done, that there is going to be a smoother change of command than we thought in the United States, that has boosted the markets in general, and also the vaccine. So, there are three elements Very powerful, and that’s what has driven copper. Inventories keep going down, so copper keeps going up, basically. ”

New “super cycle”?

Regarding how he expects copper to behave in the medium term, Lagos stated that “a few days ago I thought that the price for next year would be around US $ 3.2, but I can be wrong obviously, maybe I will be Far away. It could be that 2021 is a really exceptional year. ” That said, and asked if he thinks this could trigger the beginning of a new copper “super cycle”, he did not assure or rule it out, but he did state that a possible threat is that “in 2022 several mines will enter production , that is supposed to affect the price downward, but the truth is that it is not so easy to produce copper, so I am not so sure about those predictions, also I think that the rest of the mines are not so clear that they maintain their production, then it is not enough that new ones come in. ”

“Now, it is possible that with this price a lot of people get into producing that they were not producing before. In addition, there is pressure from scrap, when the price rises, the price of scrap (copper) also rises. Therefore, I think that we are going to have a very good price in 2021, which I estimate at US $ 3.2, maybe it may be a little higher, but I don’t think it will be more than US $ 3.5 “, he pointed out. adding that seeing copper trading at US $ 4 a pound is “much bigger words (…), it may eventually reach more than US $ 3.5, but it will not hold at those numbers.”

Guajardo, for his part, said that his vision of the medium and long term regarding the price of the red metal is “positive, because the demand for copper looks very positive due to the issue of decarbonization and electromobility. meaning greater consumption of copper. And on the supply side, it is being very difficult to develop projects not only in Chile, in many other countries there are difficulties. So, with this scenario, one sees that the market has good fundamentals of supply and demand “.

That said, he preferred not to qualify this moment as an eventual “new super cycle”, but “I can say that we are likely to have a prolonged period of significant high prices.” Of course, he assured that there are also risks resulting from the effects of the pandemic: “There is a high probability that, in the middle of this, there will be a financial crisis of a considerable size. So, it seems to me that the best description I can give is I believe that there will be a period of high prices (of copper) that will be prolonged, but with a significant risk of an intermediate crisis due to the imbalances that are incubating in the world economy. ”

Merino, from Sonami, was more cautious, stating that “it is not ruled out that in the short term copper may continue to rise, however, I would say that we must be cautious, because next year a significant supply of copper will enter the market , to which is added certain risks that are related to the behavior of the world economy, particularly in relation to the effects of a second outbreak of covid and an economic recovery slower than estimated “.

“We must not lose sight of the fact that the rapid increase in the price observed in recent days is mainly explained by the strong momentum of investment funds. Therefore, I reiterate, we must have a large dose of caution regarding the price future of copper “, he stressed.

In turn, Tomás Flores, economist and researcher at Libertad y Desarrollo, does not estimate that the red metal is facing a new “super cycle”, stating that “we are in the recovery of price levels to the trade war between the United States and China and the pandemic. ”

Tax contribution

However, Merino stressed that the “rise in the price of copper is very good news for Chile, the increase in the price of the main mining and export product, boosts the economy and increases the contribution of this productive sector to fiscal financing”, adding that “in effect, for every average annual dollar cent that the copper price increases, Chile increases its income by US $ 125 million from exports and the treasury by US $ 60 million from Codelco surpluses and private mining taxation” .

Along these lines, Lagos reaffirmed that for each average annual cent of the dollar, around US $ 60 million enter the treasury, different from the calculation of the Budget Office (Dipres), which estimates that each additional cent in the price of copper contributes about US $ 20 millions. In the academic’s opinion, at Dipres “they gave some numbers that were not correct. But, in any case, with these prices we are making a very high contribution to the treasury.”

Finally, Guajardo also made the point that Dipres “for some reason has a fairly conservative projection of what the contribution of copper to the fiscal coffers means. All the people I talk to in the mining world have a highest estimate “.

“We calculate that a penny that is maintained for a whole year means US $ 50 million for the fiscal coffers. Without a doubt it is an important injection of resources for the country and that it will be needed more than ever,” he concluded.

Source: Emol

Translated with Google Translator