Factors for and against a new copper supercycle

In favor

1. Chinese demand

In recent weeks, the conjunctural elements have weighed the most, pushing the price of copper above US $ 4 a pound. Mainly, the best prospects for the Chinese and world economy. “China shows a sustained and general improvement. And investment has been the main driver, especially that linked to public infrastructure ”, says Claudio Valencia, CEO of 1st Quartile Mining. “That has benefited copper imports,” he adds.

2. A structural reason

At a more structural level, the main factor that suggests that a new supercycle is coming is the additional demand for copper, which is beginning to be generated and is expected to increase, due to the boost from green energy, says Juan Carlos Guajardo, director Plusmining executive. This is one of the factors that motivates investment banks the most. At JP Morgan they believe that a new supercycle is being entered, as published in February, and that prices would skyrocket due to “unintended consequences” of the fight against climate change: demand for copper would increase given its use in energy infrastructure renewable, batteries and electric vehicles. Other banks such as Goldman Sachs and Bank of America add to the optimism.

3. The extremely high liquidity

But there are also more financial factors. The stimulus packages of the different governments, to get out of the economic crisis, also boost the price of copper. Excess liquidity, explains Guajardo, leads investors to seek more attractive returns than those provided by traditional instruments. “That has led to a bullish streak in commodity prices,” he says.

These stimulus plans also have side effects that also drive the price. The first is the risk of higher inflation (having more money for consumption), which moves investors towards raw materials. “They serve as a refuge against a period of inflationary prospects,” says Andrés Abadía, an economist at Pantheon Macroeconomics. Second, a low price of the dollar lowers the costs of commodities for countries that do not use that currency. “This raises demand and is a factor that was seen in the past cycle,” says Valencia.


1. Half green boost

But the optimism of Wall Street, which has led investment funds to bet on a new supercycle, could not be justified, since the “green” impulse, says Guajardo, has contradictions. Factors such as electromobility could drive demand, but it is not yet a fact and other elements, such as the recycling drive, could contain it. “There could be more raw material available through recycling,” he says. “Large companies have already proposed consuming only recycled products.”

2. Chinese transitions

One of the main global factors that could undo the supercycle theory is explained by the expected transitions in the Chinese economy.

The first is from growth driven by industrial development to one based on services and consumption. “This will lead to a slowdown in the growth rates of Chinese copper demand,” says Erik Heimlich, an analyst at CRU. The second is a quest to “deleverage,” says Abadía. “Construction is under pressure and we don’t think it will grow back the way it did in past cycles,” he adds. And there are rumors that the Chinese government bought a lot of copper last year, taking advantage of low prices, which would limit demand in the short term.

3. There are more projects

The offer will also not be so close as to promote a supercycle, according to Heimlich: “There are many new projects that will start operating in the next 2-3 years. And the fall that mining investment suffered has occurred to a much lesser extent than the one prior to the supercycle of the 2000s. “It has been less than a decade, it cannot be compared with the elements that sustained the previous supercycle,” says Guajardo. .

4. Financial contradictions

Financial factors also have contradictions, especially because it is not clear how long the excess liquidity would last. “It lasts as long as the countries maintain the stimuli; I estimate that it will be a few years, but it is a phenomenon with many risks: it raises imbalances that can trigger financial crises or violent corrections, ”says Guajardo. An adjustment was already seen last week with copper falling to less than US $ 4.

Inflationary fears could also fade. “They are premature and not enough to power a supercycle,” says Heimlich. And the dates don’t add up. “Supercycles take more than 20 years from one peak to another, they are long-lasting events,” he adds. “The recent rebound has been driven by factors that are more transitory than long-lasting.”