The recent price drop has investors wondering if now is the time to buy. UBS analysts have weighed in, providing a nuanced view of the current and future prospects for copper.
According to UBS, speculative momentum rather than fundamentals pushed copper prices to near-record highs in May.
Investors would position themselves for medium-term structural shortages, driven by growth in energy transition demand and mining supply constraints. However, UBS believes the focus has now shifted to near-term demand risks, especially in China, along with a lack of tangible improvement in Europe and the US.
UBS notes: “Near-term fundamental signals for refined copper remain weak,” noting that weak data and a lack of support from China have exacerbated the situation.
The bank’s analysts say this shift has led to a 60% drop in LME net long positioning and a 20% correction in copper prices.
Furthermore, UBS believes that near-term fundamentals have deteriorated more than expected, with inventories rising and a surge in Chinese exports of refined products.
Weakness in refined copper demand has been accentuated by mid-stream destocking and delays in state grid purchases. “European demand may not get materially worse… but not better either,” UBS added, highlighting continued weak sentiment in the region.
On the supply side, the bank says major copper miners are lowering their production forecasts. Despite the tight concentrate market, refined production remains robust, especially in China.
UBS expects the smelter cuts to take place in late 2024 or early 2025, when annual benchmark treatment charges will decline.
Despite these short-term concerns, UBS remains optimistic about the medium-term prospects for copper. The analysts say: “The secular demand drivers (renewables, electricity grids, electric vehicles) remain largely intact.” They foresee a tighter physical market in the next six to twelve months, which will lead to higher prices.
Although short-term fundamentals are weaker, the long-term outlook for copper remains positive, according to the investment bank.
