China's Real Estate Woes Provide Opportunity for Copper Consumers

Copper stumbles in early 2024, but bullish news emerges. 

So far in 2024, LME copper prices are down about 1%. Similarly, the futures forward curve has changed little and remains in a steep contango. This means that futures prices are higher than the nearby spot market. A contango market suggests that there is currently ample supply.

Codelco production dissapoints.

Despite the current perception that the market is amply supplied, the world’s largest copper miner, Chile’s state-owned producer Codelco, struggles with output. As the chart below shows, monthly production has been falling for some time, and annual production is at a 25-year low. 

To increase production, Codelco, which is already debt-ridden, issued two tranches of debt in late January, albeit at higher interest rates than several other recent sales. As several analysts interviewed by Bloomberg recently stated, debt buyers are willing to finance Codelco’s new projects, but these creditors remain leery about Codelco's growing debt pile. S&P Global recently stated, “There’s no clear direction and the company is losing profitability and volume, and that makes it more vulnerable to price drops. This path of continuing to issue debt to finance deficits clearly deteriorates the credit profile.”  (Source: Bloomberg)

Chinese real estate remains a burden, but..... 

As stated in the opening paragraph, Chinese copper demand remains sluggish. This is especially true for the country’s floundering real-estate sector. On Sunday, January 28, Evergrande Group, once China’s largest property developer and its most indebted, was ordered to liquidate by Hong Kong authorities. As Bloomberg stated on Tuesday, “This is another blow to the confidence of investors and potential home buyers in the domestic market that leads to further deterioration in the housing sector.” Goldman Sachs echoed similar comments, proclaiming, “Most investors and Chinese commodity consumers are bearish on China aggregate and commodity demand, as they don’t see solutions to excess capacity in the property and manufacturing sectors, and to dismal consumer confidence.” Even prior to this latest setback, Chinese new home prices, a key gauge of real estate demand, have been in freefall since mid-2023.

End users should consider hedging!

Even though copper prices have been trending sideways for the past several months, copper consumers should consider hedging term usage while global demand remains sluggish. Below, we detail several strategies that end-users could implement. Please contact us for more information and specific strategies.

AEGIS can build your hedging program.

AEGIS can help copper buyers develop specific strategies that fit their operations. We are also happy to introduce new clients to more counterparties, therefore ensuring that you are receiving the best possible price. Please contact us for details.