Copper (HG=F) prices have risen this year amid a supply squeeze. Wells Fargo Head of Real Asset Strategy John LaForge joins The Morning Brief to discuss what is driving copper prices higher and the commodity’s outlook.
“We, frankly, are not producing enough copper, and yet, there are buyers everywhere right now for copper,” LaForge says. However, he explains that the recent rise “was much more speculator-based and wasn’t about fundamentals.”
He adds that commodities have been among the “best-performing major assets out there” since the coronavirus pandemic despite often being overlooked. “Decade after decade, mankind uses more and more commodities, so you have demand going up all the time,” he explains. Major factors that impact commodities usually boil down to underlying fundamentals rather than geopolitical roadblocks, LaForge notes.
“We were running dry on refined product. And you had some speculators come in and take advantage of that on a futures basis,” LaForge says. He adds that despite this bump in the road, demand will continue to surpass supply, driving prices higher.
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This post was written by Melanie Riehl
Video Transcript
Copper prices.
It’s been on a massive run since the start of the year.
You can take a look at this move to the upside here on your screen year to date.
We’re looking at gains of just around 30%.
Now, this latest move higher that has really picked up steam here in the last couple of trading days.
A lot of that has been attributed to the supply squeeze that we’ve got going on the surge in demand that we will likely see for A I cap green cap spending that’s likely to go on.
That has been fueling the surge that we are seeing higher in copper prices.
So here we are today with that jump of just about 30%.
Now, I want to point out what has really stuck out to me is the difference of what we’re seeing the divergence between the pricing in New York and in London.
When you take a look at that gap that’s playing out for the June and July, you can see a massive gap here city in a recent note, pointing out that’s normally around 90 bucks at 90 bucks a ton here and we have certainly seen that wide divergence here almost at record level.
So that of course kind of points maybe to the squeeze that could potentially be happening here as traders maybe try to position themselves for what they expected to see in terms of snap back of that premium and the price of the US uh copper right now.
But clearly that has yet to take place.
So an interesting dynamic that is going on in the price of copper right now.
And also to compare that to some of the excitement that we’ve seen in other commodities.
First.
Let’s take a look at gold because when you take a look at the price of copper versus gold, you can see copper even outperforming gold here are really taking over at the end of last month.
You see gold futures up just around F-16, 17% year to date versus almost a double here that we’ve seen in the price of copper, which is up just about 30%.
And we have seen the shift to many of these commodities here catching a bid.
We were talking to a guest earlier, strategist earlier in the hour talking about the fact that some traders are trying to hedge against inflation, buying some of these commodity prices.
So that has been fueling some of the gains.
But we’ve almost seen this excitement play out across the board and we wanna take a look at the gains that we have seen more broadly speaking beyond commodities year today.
And this is a great chart here.
You copper by far the outperforming, you take a look at some of these sectors here or plays.
That’s up 31%.
Like I said, you’ve got tech stocks and gold, both up just around 20%.
Utilities also catching a bit.
So you’ve seen this excitement play on equities in gold and copper commodities.
So investors really trying to find different pockets of the market trying to position them their portfolios best is certainly an a couple of months ahead.
So here to talk more about what is driving copper specifically higher and where do prices go from here?
Is there mu uh much upside here from these levels we wanna bring in John LaForge, he is Wells Fargo’s head of real asset strategy joining us now and John talk to me just about what you attribute this recent rise to and whether or not there is much room to the upside from these current levels.
Well, I’d say that the most recent move.
So this move to five, let’s call it $4 a pound to $5 was more speculators.
Uh It was essentially contract based.
Uh There was an arbitrage going on.
So uh essentially you saw a little bit of a short squeeze.
Uh but that can only really happen because underneath the surface, you have these fundamentals where we frankly are not producing enough copper.
Um And yet there are buyers everywhere, right now for copper uh across the globe you have, it doesn’t matter if it’s China, India, the United States.
Uh everyone’s pushing to go green.
Uh and copper is the number one metal when it comes to uh that type of future, um there’s really no substitute for what copper does.
Uh And so underneath the surface, you really have good fundamentals.
But I’d say this last little move.
So we’re up 30% on the year.
Let’s call it the last 10 to 15% uh was much more speculator based and wasn’t about fundamentals, John to the extent that we can.
What is the kind of, as you were mentioning, the international marketplace here for copper as well to what extent is this and the broader commodities landscape right now really hinging on geopolitical kind of factors uh for copper, not much.
Um what’s generally happening now is if you go back since COVID uh commodities are one of the best performing major assets out there, period, they kind of go under the radar and that’s across the board.
Uh And that’s because frankly, it’s not geopolitical, it’s the fundamentals underneath commodities.
There isn’t enough supply.
Um demand tends to rise through time and I’m talking decade after decade after decade, mankind uses more and more commodities.
So you have demand going up all the time just a little bit, 1 1.5% a year supply is the kind of key in here.
So the last four years, we haven’t had enough supply uh across the board, whether you’re talking copper, gold oil, it almost doesn’t matter.
Um, so what you really have is a commodity super cycle that started four years ago, that’s pushing all commodities higher.
Um, so I’d say it’s less geopolitical, uh, and much more the underlying fundamentals.
You probably have another 6 to 10 years left of really strong commodity performance.
Well, it really puts it in perspective, John, I’m curious when we talk about the the the divergence or the gap between what we’re seeing the pricing action in the US versus what we’re seeing in London.
That chart that we had up there uh earlier in the segment is that because going back to what you were just saying about supply supply is tighter here in the U SS or talk to us and just exactly why we’re seeing such a wide gap.
Yeah, supplies are tighter here.
So you have a lot of the Refiners take, the Chinese Refiners are trying to get ships and trying to get it here.
Uh So the situation, if you look at Shanghai, it’s not nearly as dire from a supply perspective.
Uh In fact, inventories right now for refined copper are at let’s call it 2.5 year highs in, in Shanghai.
So it’s not that bad.
This is much more about futures contracts and something quirky that happened in the United States that we were running dry on refined product and you had some speculators come and take advantage of that on a futures basis.
Um Doesn’t change the fact though.
Uh we’re gonna look out a year from now and two and three and we’re probably gonna be stuck with the same dynamic, which is, you have roughly about 5% more demand growth in the world than we do supply growth with copper.
Um So prices are going higher, uh longer term, you know, maybe this little squeeze we’ve seen uh deflates a little bit over the coming months.
But, but generally I’d expect prices to be higher is copper a perhaps annexed chip trade here as well.
Uh No, I I mean, we could frame it that way in the short term.
Uh I kind of like that.
Uh But, but generally, no, I’d say if you look around the globe, we just don’t have the supply.
So we, we could say it’s some type of uh ship play or, or arm play between China and the United States and so on.
But if you look at the major producers in the world, the countries, this is just about supply.
Only the Congo saw an in increase in ore production, copper ore production last year.
The other major areas all flat, last year, all flat.
And we’re talking us China Canada, you name it right down the line.
Um We just don’t have the ore production and yet if you think of the globe everyone’s kind of in this, um, I don’t want to say irrational world but they just want to be green.
So price doesn’t matter much and they just kind of push forward.
Um, so I’d say it’s, you know, chips, of course, use a lot of copper.
Same with, you know, evs and you name it, but I wouldn’t put it on chips.
I, I put it on just generally there’s a lot of buying and it’s not always rational buying.
They’re just willing to pay whatever price there is out there because they want to move forward with again, whether it’s chips.
Green world, you name it.
It’s kind of this, this buying that’s persistent and isn’t gonna stop anytime soon.
All right, John LaForge.
Always great to hear your insight.
Thanks so much for hopping on with us this morning, Wells Fargo, head of Real asset strategy.
We appreciate it.
Thank you.
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