Copper Price Reaching New Highs

The front month LME copper is currently trading at $10,329 per metric ton, more than the high of $10,190 per ton reached in February 2011. We believe that a combination of tight supply and strong demand could push copper prices back to all-time highs. As a metal that will be a key enabler in the upcoming energy transition and burgeoning global infrastructure boom, the longer-term projections for copper also look positive.

A Market in a Supply Deficit

In October 2020, the International Copper Study Group (ICSG) forecast that the copper market would be in a 50,000 ton supply deficit in 2020. In fact, data published by the ICSG last month showed a 559,000 ton deficit for the full year 2020—more than 10 times the deficit expected back in October.¹ In 2019, the copper deficit was 375,000 tons.

The ICSG pointed out that demand outside China was weak in 2020, falling by close to 10%. However, Chinese demand for copper rose 38%, offsetting the weakness elsewhere. Some of China’s purchases may have been made by the State Reserve Bureau, but the ICSG’s estimate, adjusted for stock changes in Chinese bonded warehouses, still amounts to a deficit of 456,000 ton. After its spring meeting last week, the ICSG said it expects a 79,000 ton surplus for 2021 and a 109,000 ton surplus for 2022. But given the group’s recent record and that the rest of the market is expecting a deficit, we are skeptical.

Chinese customs² data indicates imports of unwrought copper and copper products were up 11.7% in the first quarter of 2021 compared to 2020 and stand at the highest level (for Q1) since 2016.

Stretched Long Positioning Has Been Flushed Out

Net positioning in LME copper futures hit a decade high of 73,000 contracts net long in December 2020. Since then, positioning has cooled to just 50,000 contracts net long. We think this is a healthy development that has opened up a better entry point into copper.

Net Speculative Positioning in LME Copper Futures

Copper Futures in Backwardation

The copper futures market is in backwardation, which is a sign of tight supply. Markets in backwardation can potentially provide a source of positive performance for investors in commodities.

Copper (LME) Futures Curve

Motivated by our bullish case on copper, we over-weighted copper in the WisdomTree Enhanced Commodity Strategy Fund (GCC) for 2021, with a target weight of 8.5% compared to 5.39% for the Bloomberg Commodity Index (BCOM) and 4.97% for the S&P GSCI Index. Our enhanced rolling mechanism also attempts to maximize roll yields for a backwardated curve.

Copper Futures Curve as of 4/30/2021

Implied Roll Yield, Adjusted for Time

¹In fact, in October 2019, the ICSG predicted a 280,000k ton surplus for 2020.
²Customs General Administration PRC.