BofA Securities: Copper and Iron Ore Outlook

Analysts at BofA Securities have outlined a clear view on two important industrial metals, copper and iron ore, showing starkly contrasting fundamentals.

Copper's Strong Position

Copper is in a strong position due to high demand, limited supply, and increased investment in energy transition projects. Prices have shown remarkable resilience in 2024, rising 6% year-to-date (YTD) despite global macroeconomic challenges. BofA analysts attribute this strength to several key factors:

1. Tight Mine Supply: Reduced output from mines and challenges in refining have constrained copper supply.
2. Lower Treatment Charges: Treatment and refining charges (TC/RCs) have dropped sharply, highlighting the difficulties smelters face in processing copper.
3. Energy Infrastructure Spending: Spending on energy infrastructure, particularly related to decarbonization, has significantly supported copper demand.

In China, investments in grid expansion have counterbalanced weaker demand from other sectors like housing, providing crucial support for copper.

Supply chain disruptions and limited availability of concentrate have worsened copper’s supply constraints, leading to expectations of a market deficit and keeping prices high. Analysts indicate, “Manufacturing activity should stabilize as the Fed cuts rates, so we maintain our constructive copper view into 2025.” As such, copper prices are expected to continue rising, with forecasts suggesting a climb to $10,750/t by 2025.

Iron Ore's Challenges

Historically a major consumer of steel and iron ore, China's real estate sector has drastically cut its demand. In 2010, it accounted for 50% of China’s iron ore consumption, but by 2024, this share has dropped to 20% driven by government regulations and a slowdown in housing starts. Additionally, steel production, closely linked to iron ore demand, is declining. While demand from other sectors like machinery has provided some offset, it hasn’t been enough to counteract construction downturns.

This led to negative steel mill margins in China, prompting further production cuts. On the supply side, major producers like Australia and Brazil have increased their iron ore exports, worsening the oversupply situation. Analysts noted, “With a surplus of 190mt, or 7.5% of total supply expected for next year, prices may fall below $80/t.”

Conclusion

BofA highlights that the differences between the copper and iron ore markets stem from their supply and demand fundamentals. Copper, essential for the global transition to green energy and characterized by tight supply, will likely keep its price support. In contrast, iron ore, reliant on China's struggling property sector and rising global supply, faces ongoing downward price pressure. BofA remains bullish on copper, expecting price appreciation as economies stabilize and green energy projects ramp up, while iron ore’s outlook appears grim.