Fear of inflation and green hope push investors towards copper- DRC

A flood of investor dollars took the industrial metal to a seven-year high of $ 7,520 a tonne this week. But traders, recalling the last major bull market for copper when the metal surpassed $ 10,000 a tonne in 2011, brace for more fireworks as the prospect of a global economic rebound raises concerns about inflation and that governments invest money in a metal-intensive “green” stimulus package.

“We are in an unprecedented situation because there is more money than ever to be looking for something to do,” said Mark Hansen, CEO of London-based metals trading company Concord Resources Ltd. “Copper may not have had an investment theme with the potential for ‘green’ applications since the demand-driven bull market 10 years ago. “

It is a remarkable turnaround. The copper market, like most of the commodities sector, has been in the doldrums for almost a decade. Prices have fallen more than 50% from their record highs in 2011, trading below $ 5,000 per tonne in a slump in 2015-16 and again in 2020. Miners’ shares also fell . Hedge funds specializing in commodities, such as Astenbeck Capital Management LLC and Clive Capital LLP, have largely died out or shrunk to a fraction of their original size.

But now, commodities are favored amid expectations of a rebound in the global economy, a weaker dollar and rising inflation. The Bloomberg Commodity Spot Index has risen 43% since March.

“We expect inflation to exceed current market expectations, given the unprecedented increase in monetary and fiscal policy that we are seeing,” said Evy Hambro, who helps manage $ 16 billion as a manager. global thematic and sector investment at BlackRock Inc. in London. “When you look back, commodities and mining stocks have acted as effective means of playing against rising inflation expectations. “

This is true for all commodities, but copper benefits from more specific factors that make it a preferred bet for long-term investors. While many expect oil prices to rebound in the near term as the world begins to return to normal, there is more doubt about its long-term outlook as the energy transition accelerates. Copper, on the other hand, is likely to benefit from the change due to its use in electrical wiring.

Goldman Sachs Group Inc., which this month predicted a new “structural bull market” for commodities, argues that stimulus plans – such as China’s new five-year plan, the European Green Deal and the President-elect Joe Biden for the United States – could have an impact similar to that of Chinese infrastructure construction in the 2000s.

“The world is reshaping transportation, power generation, information storage and the distribution of goods,” said David Lilley, a copper market veteran who touts his new metals-focused hedge fund , Drakewood Capital Management in London, as seeing a comeback in the world. high teens ”since its launch in May.

“Governments around the world are supporting and encouraging the transition,” he said. “The consequences for the demand for metals are exciting. “

Unlike oil, copper supplies are already tight as demand is less affected by the pandemic. There are also short term factors that make copper a worthwhile bet. Unlike oil, copper supplies are already tight as demand is less affected by the pandemic and because China has ramped up purchasing as prices have fallen.

Chinese imports of copper and refined products have jumped 41% this year – an increase of 1.6 million tonnes, more than Germany’s annual demand. The mine supply has also been reduced by closures due to a pandemic.

Yet traders increasingly view investment flows as the primary driver of prices. Bullish copper bets are the highest on record in data dating back to 2014, according to Citigroup Inc.

This could suggest that the positioning is already stretched. Indeed, analysts at the bank indicate that the outperformance of copper over non-traded metals such as manganese and molybdenum shows that prices are determined by investors.

“With physical indicators generally still weak outside of China, and no sign of a deficit globally, we can say that the increase in positioning has driven prices,” Citigroup analysts, including Max Layton said. , in a note last week.

This does not mean, however, that new investment flows cannot drive up prices even more. With central banks responding to the pandemic by unleashing an unprecedented wave of liquidity in global markets, historical positioning measures may be less relevant.

“The power of the ‘green story’ is significant,” said Hansen. “Once these narratives are successful, what copper is about to have, short-term fundamentals won’t matter.”