Citi: The second round of the bull market for copper has just begun

Citigroup, the Wall Street investment banking giant, has recently forecasted that, following the bull market in the early 2000s driven by China's urbanization and industrialization, the second round of a long-term bull market for copper has begun. The cyclical weakness over the past 18 months has suppressed the bull market, but now, this resistance is fading. In a research report released last week, Citigroup's analyst team led by Maximilian J Layton pointed out that, compared to the first round of the bull market, the triggers for this round include the growth in decarbonization-related demand (especially in renewable energy, the power grid, and electric vehicles) and the increasing demand for emerging AI/data centers. Citigroup has raised its short to medium-term copper price forecast, expecting copper prices to rise to $9,700 per ton in the short term (0-3 months) and to reach $10,000 per ton in the fourth quarter of 2024. By 2026, Citigroup expects copper prices to rise to $12,000 per ton in the base case scenario and to $15,000 per ton in the optimistic scenario. As of the time of writing, London copper futures are trading around $9,467 per ton, about 6% below $10,000. As we enter March, London copper futures have climbed steadily with a cumulative increase of over 10%, showing a very rapid upward trend. Triggers for the Second Round of Bull Market Citigroup points out that, against the backdrop of growing confidence in a turning point in the economic growth cycle, investors are driving the rise in copper prices. The strong rebound in copper prices over the past six weeks has been supported by a surge in net long positions by investors, which is consistent with the rebound in key manufacturing indicators. Despite continued soft European data, recent increases in US and China PMI indices suggest that the manufacturing cycle may be turning, and investors may be pricing this in. They may also believe that the impact of the central bank's interest rate hike cycle has largely been digested. Central banks may cut interest rates faster or by a larger magnitude, which also limits the downside space for copper prices due to the rise in debt repayment burdens leading to weak economic activity. In the commodity sector, copper is the preferred instrument to express this growth trade. Themes of decarbonization and AI data center demand, as well as significant constraints on mine supply growth in 2024, have led the market to widely expect a copper supply shortage, providing additional support for copper prices Against the backdrop of the AI infrastructure investment boom, Citigroup particularly emphasizes that by 2026, data center construction will provide additional impetus to copper demand. Citigroup has raised its baseline forecast for copper demand in data centers from the previous 10,000 tons per gigawatt to 20,000 tons. Citigroup stated that if cyclical demand exceeds expectations this year, coupled with the continued strong growth in electric vehicle penetration, rapid progress in renewable energy and grid construction, and the ambitious goal of tripling renewable energy growth proposed by COP28, then in an optimistic scenario, copper demand will achieve even stronger growth. Supply Tightness May Support Copper Prices While demand flourishes, the supply side is expected to face tightness. Citigroup has lowered the copper mine supply growth rate for 2024 from the previous 2.3% to 0.7%, citing declining production in Peru and Panama, as well as slow growth in refined copper production constrained by mineral supply. Copper scrap supply will increase under the push of rising copper prices, but it is difficult to fully offset the expected supply-demand gap. Inventories are already at low levels, with limited room for further decline in upstream supply chain inventories. In a scenario of supply shortage, Citigroup predicts a total deficit of approximately 1 million tons in the copper market over the next three years. Are You Ready for Risk Hedging? In addition, due to the ability of consumers to hedge to reduce income volatility and significantly lower input costs before a bull market, thereby reducing capital costs, increasing returns, and adding "corporate value", Citigroup's report particularly emphasizes the importance of corporate users hedging risks in copper before this bull market. Citigroup forecasts that in a bull market and consumption scenario, unhedged consumers such as car manufacturers, developers, and power companies may face cost increases of up to $320 billion over the next three years (about 0.4% of global GDP), while in a base scenario, cost increases are estimated at around $125 billion (about 0.15% of GDP)