Market dynamics for copper are at a crucial level and it’s questionable to what extent the global refined copper supply chain can handle the scale of current supply disruption.
Global exchange supplies of copper are at a 16-year low and there are currently just 276,000 tonnes of copper sitting in the world’s major exchanges. LME stocks have fallen since the start of the year and at less than 80,000 tonnes are equivalent to just over a day’s global usage.
Current market stresses are reinforced by the latest data from the International Copper Study group (ICSG) that showed a supply deficit in world markets during 2021, which reflects the impact that covid has played on copper production over the past couple of years.
Chile and Peru are by far the two biggest copper producing nations in the world – they produce almost as much copper as the other top 8 nations in the top ten combined – and although production is ramping up out of South America, like most industrial commodities at present, supply cannot keep up with demand.
Crude oil has eased somewhat from its recent highs to be trading just above the $100 a barrel mark, but this still represents a strong price level for producers, and one that importantly helps ease the prospect of demand destruction. Demand destruction is the biggest fear for oil producers during periods of significant price strength, as it can lead to lower over sales volumes.
Interestingly, if we look at what’s happening in the US, which is the world’s biggest consumer of oil, we see that demand destruction has not really occurred. And there are a few possible reasons for this.
Firstly, Americans’ fuel expenditures as a share of total spending are much lower today than they were in the past. During the month of January, outlays on fuel were just 2.3% of the total, according to the latest available Commerce Department data, and well below the long-term average.
Secondly, whilst the average retail fuel price in the US may have climbed to a record high above $4 a gallon this month, when adjusted for inflation, it’s below the peak of slightly more than $5.20 set in July 2008.
Thirdly, for demand destruction to take place it probably needs to be accompanied by a broader economic slowdown – which there doesn’t appear to be any evidence of so far in the US.
The fourth and final reason is that oil demand overall for the last 40 years has proven to be resilient, no matter what the circumstances. Even if we go back to the GFC, which was the worst recession in two decades, there was an approximate 1.4 million barrel per day decline in global demand over a two-year period. But this was barely a blip in terms of crude demand worldwide.
In other words, oil demand has been incredibly resilient, and we would anticipate it will remain so.
It’s worthwhile reflecting on the recent Fed meeting and its outcome, which saw a long-awaited interest rate rise and a possible further six rate hikes this year. Now, despite the very hawkish tone, gold went up in terms of its initial reaction.
What the market is telling us in terms of gold’s price performance involves a few things. Firstly, given current uncertainty it doesn’t believe that the Fed will hike rates a further six times in calendar 2022. Secondly, the Fed sees inflation now as even more persistent, and they also anticipate a slowing in economic growth. Now, some might interpret higher inflation and slower growth as stagflation – which should be positive for gold prices.
So far, we’ve seen the price of gold performing robustly in the wake of what was a very hawkish Fed meeting – which leads me to think that the Fed’s hawkish actions are already priced into gold. Although it remains to be seen whether gold’s price resilience will prove to be sustainable, history suggests that when the Fed started its previous tightening cycle in December 2015, the price of gold bottomed out. So, if history does repeat, there are positive signs for gold.