Last week, copper reached its highest level in a year after major Chinese smelters decided to decrease production due to lower treatment and refining costs. Despite some short-term demand concerns, there is strong reason to believe that the copper market will rally some more over the medium term. 

China Curbs Copper Capacity

Copper prices jumped beyond $9,000/t recently, reaching their highest level in a year after months of range-bound trading. The increase was driven by news about copper smelters in China’s decision to cut output in response to a tightening copper ore market. This equally follows a decline in spot treatment and refining charges that fell to new lows. Spot charges in China dropped to $9.40/t last week after an 80% drop since the beginning of the year.

Treatment and refining charges are the fees paid to smelters to transform concentrate into metal. They also provide a useful indicator of copper's future direction. A tighter concentrate supply leads to lower treatment charges, which can be attributed to tighter markets and increased smelting capacity in China. Meanwhile, the green energy industry's rapid growth has increased demand for metals, and the National Bureau of Statistics of China finds that refined copper production increased by 13.5% year on year to 12.99 million tonnes in 2018. Copper stocks on the Shanghai Futures Exchange (SHFE) hit their highest level since 2020, indicating that demand in China remains restrained even as output increases. 

Are the Global Copper Markets Tightening? 

• A copper concentrates market shortfall is expected this year due to supply constraints. Most recently, in Panama, Canada's First Quantum Mine prompted massive protests and was forced to suspend operations. The Panama copper mine is one of the world's largest producers of copper, accounting for around 1.5% of global output and 2.5% of China's copper concentrate imports last year. 
• Meanwhile, copper mines that are still in operation are reaching their capacity due to declining ore grades and reserve exhaustion. The world's largest copper mine, Escondida in Chile, has reached its peak, and output in 2025 is expected to be at least 5% lower.
• In Chile, Codelco, the world's top copper supplier, is seeking to return production to pre-pandemic levels of around 1.7 million tonnes per year by 2030, up from 1.3 million tonnes in 2024. At the same time, high-quality large-scale projects are fewer, potentially driving the copper market into a deficit as demand from the green energy industry develops.

As a sign that the copper ore market is tightening as smelters expand, copper-concentrate supply contracts for 2024- that specify processing charges have been decreased by 9%. This was the first fee drop since 2021, following a six-year high in 2023.

Will the Fed Loosening Support Copper? 

Copper prices have also climbed as the Federal Reserve's interest-rate tightening cycle comes to an end. Over the last two years, increased interest rates and a stronger currency have hurt industrial metal pricing. Looking ahead, a weaker US dollar will help copper prices as the Fed eases policy. It is reasonable to believe that the Federal Reserve's interest rate path will continue to influence copper's short-term price outlook.

Copper will benefit from looser monetary policy, which will relieve financial pressures on manufacturers and the building industry by slashing borrowing costs. However, if US interest rates remain high for an extended period, the US currency will appreciate resulting in lower copper prices.

What Does Copper’s Future Look Like? 

In the medium term, macroeconomic issues such as ongoing demand concerns in China and uncertainty about US monetary policy may limit copper prices' upside potential. However, as supply tightens, price dynamics for copper are becoming more positive. The demand side is expected to progressively improve this year, especially in the green energy industry. 

Copper is widely used in the world, including EVs, wind turbines, and power grids. Copper is an essential component in electric vehicles, including motors, batteries, wiring, and charging stations. Copper has no substitute for its use in EVs, wind, and solar energy, and its unique characteristics as a green metal will drive prices higher in the coming years. Last year, growing demand for renewables and electric vehicles in China offset a decline in more traditional sectors such as the real estate market, and this shift in demand for drivers will continue this year. 

Copper prices are predicted to rise to $8,700/t in the second quarter, the traditionally greatest period for copper demand, from $8,400/t in the first quarter. Prices are expected to peak in the fourth quarter at $9,000 per tonne. They will, however, remain volatile as the market responds to macroeconomic issues like the path of US interest rates and Chinese policies. 

The BHP Group Ltd (ASX: BHP) saw its share price soar in late October through the end of 2023 as shares in the S&P/ASX 200 Index (ASX: XJO) iron ore miner rocketed 17% to $50.72 apiece. However, rising metal prices caused the STOXX® Global Copper Miners index to rise 16.3% in March, its strongest monthly increase in three years. Meanwhile, mining stocks such as BHP Group Limited (ASX: BHP) and Cobre Limited (ASX: CBE) rallied and are poised to perform well in 2024 due to strong metal demand and supply constraints.