By Pratima Desai

LONDON (Reuters) – Investors leaving the copper market may remain sidelined for months, allowing physical players to dominate as they anticipate weaker demand in top consumer China and elsewhere, which could lower prices.

Earlier this year, a buying frenzy fueled by expected copper shortages led to a rally on the London Metal Exchange (LME), pushing prices to a peak above $11,100 per metric ton in May. Momentum trading contributed to this increase, while commodity traders bought copper to meet their obligations to sell on COMEX, part of CME Group (NASDAQ:CME).

However, copper prices have since fallen nearly 20% due to persistently weak manufacturing activity, prompting consumers to pause purchases as surplus metal is delivered to LME-registered warehouses.

“Updates to demand and refined production have pushed the market to a surplus sooner than expected,” noted Macquarie analyst Alice Fox, predicting surpluses of 265,000 metric tons this year, 305,000 tons in 2025, and 436,000 tons in 2026. She suggested that while prices might recover in the fourth quarter, larger surpluses in 2025 and 2026 could lead to a price drop back towards $8,000.

BURNT FINGERS

LME copper reached 4.5-month lows of $8,714 a ton in early August, with recession fears in the U.S. and concerns over the Federal Reserve’s high interest rates fueling negative sentiment from rising inventories and weak demand.

China, consuming more than half of global refined copper, is projected to use around 26 million tons this year, mainly for wiring in goods destined for export. A housing market slump and stagnant manufacturing pose significant challenges for copper demand.

BNP Paribas analyst David Wilson highlighted that domestic demand in China appears weak when excluding exports, leading to a predicted surplus of between 150,000 and 200,000 tons this year. As manufacturers face uncertainty about demand and exports, many have reduced stockpiling.

Data from the International Copper Study Group (ICSG) illustrated a copper market surplus of 416,000 tons from January to May, dispelling notions of significant deficits this year. LME-registered copper inventories surged to five-year highs above 300,000 tons, increasing by around 200% since mid-May. Much of this copper originates from Chinese producers unable to sell domestically, who chose to take advantage of higher LME prices compared to those on the Shanghai Futures Exchange.

In South Korea and Taiwan, stocks now make up 78% of total LME copper, compared to just 31% in mid-May.

Recent concerns about a prolonged strike at BHP’s Escondida copper mine in Chile, responsible for almost 5% of global copper production in 2023, were alleviated by a settlement.

Long-term projections, however, indicate deficits due to structural changes in copper consumption driven by new technologies related to AI and energy transition.

“We continue to view copper as essential for decarbonization,” stated Glencore CEO Gary Nagle at a recent briefing, emphasizing the metal’s critical role in upcoming spending on AI data centers and renewable infrastructure, both of which are highly copper-intensive.