Imminent Rallies Could Mean Now Is the Right Time to Buy Copper

Back in May 2024, trading floors were shrieking with echoes of copper and its relevance to the AI data center/power theme. At $11,000 per ton, Goldman Sachs claimed it as one of the best investment cases in the commodity "bull" cycle. As investors saw the prices of AI stocks make new highs, the market got desperate, drawing parallel to anything related to that theme. Low and behold, at the start of the year, copper was deemed as the next best thing to NVDA and all the AI infrastructure build-out plays. 

The only issue with such charts and correlation analysis is that it does not actually take real demand versus supply into account. Therein lies the problem, as outside of this specific play, many years into the future copper is still known as "Dr. Copper" as its price path is determined by the true economic health in China.

More than 40% of the demand growth in copper comes from Chinese housing. We all know what that has been looking like over the past few years as PBOC and the government desperately try whatever means they can to jump start their economy and boost consumer and housing demand. 

Today, copper is down about 20% since those highs as copper plays directly into manufacturing weakness and, specifically, Chinese growth weakness. China has tried very hard to announce it has various measures and tools at hand, even loans on infrastructure development and refinance loans, the latest plan to use 5 trillion yuan to 10 trillion yuan in bonds to raise local government debt limits, and even some liquidity measures to support their own markets. All this is helpful, but clearly not enough.

Given the size of the debt, it seems they would need to do a fiscal plan in the order of 20 trillion-plus yuan to get the same effect as the past. However, it does seem as if Chinese authorities are drawing a line on the sand when it comes to supporting its local indices and housing projects. Seeing a pick-up in demand and higher prices is another matter. The main issue is their currency, the yuan.

The yuan has been falling all year versus the dollar, just as the yen. This destroys their competitiveness as the fall in their local currency makes importing goods even more costly. As Trump is talking about instilling tariffs yet again, some have suspected that China could let its currency drop to make up for that shortfall. But it is not that easy. They are stuck between a rock and a hard place. Given the strength of the U.S. economy and its robustness, the dollar has kept a lid on the yuan and this has made it harder for the PBOC to do a bazooka stimulus. One can either have a strong currency or print more money, but one cannot have both. If it embarks on a massive spending spree, it risks the yuan falling even further and losing its purchasing power.

As with all commodities, demand and supply balances are extremely important for copper. At these levels, it seems a lot of the bearishness has been priced in as this is still a market that has a chronic deficit with even the conservative demand estimates, let alone the upside from data centre demand growth in 2025 onwards. 

We all know China is cheap and, more so, nobody wants to own exposure to it in their funds at the moment. Now that global central banks are cutting rates, and the U.S. Fed has eased interest rates by 75 BPS, this should inject decent liquidity into the system. Manufacturing has been the part of the economy that has been the weakest despite services doing extremely well. If we even get a small rally in manufacturing, copper is the first to rally as it is the purest play. If China is serious about putting a line under housing, then that too claims a floor for copper. 

It remains to be seen whether the dollar can keep up its strength, but when everyone seems to have given up on copper, it is usually the best time to pick some cheap ones up.

At the time of publication, Bengali had no positions in any securities mentioned.