J.P Morgan: “We keep a bearish perspective on copper in 2020”

This is what Gregory Shearer, Vice President of the Base and Precious Metals Strategy of the US Bank, is considering after the change in forecast for setting the price of the red metal for this year. He also states that, despite the progress made in the industry and the favorable projections on electromobility, energy transformation will begin to sustainably influence copper prices only in the middle of the coming decade.

The probability of a recession in the United States in the next 12 months, a production surplus and weaker demand forecasts are the main factors that would lead to a decline in the price of copper from this year and in 2020, according to the JP Morgan analysis. This is stated by Gregory Shearer, Vice President of the Base and Precious Metals Strategy of the institution, adding that the so-called electromobility boom will not have an important impact on the price of this metal in the next five years.

In conversation with Cesco, Gregory Shearer explains that JP Morgan has a more cautious projection than the market consensus on electrification, given that “the boost to the copper demand from electrification, to a large extent, will only maintain the overall demand relatively stable instead of substantially accelerating its growth.”

J. P Morgan has recently changed its forecast for the copper price for 2019 downward. In your opinion, which are the main factors influencing the market?

In the near term, we are still modestly constructive on copper prices over the balance of 3Q. We see prices averaging around $6,200/t for the quarter as a whole as more accommodative fiscal policy measures by global central banks and a relatively firmer Chinese demand environment underpins prices. On Chinese demand in particular, a change in policy that now allows local governments in China to use proceeds from local government special bond issuances as equity capital for infrastructure projects should likely boost Chinese infrastructure spending in the country by 10% yoy in 2H19, much higher than the 4% growth in 1H19. Grid spending in the country looks set to be one of the biggest beneficiaries of this boost, given its second-half-weighted nature, and we estimate the boost in spending could result in an additional 500 kmt of copper demand relative to 1H19.

That being said, we still retain a bearish outlook on copper in 2020, seeing the price average $5,400/t over the year as a whole as a stronger mine production profile, coupled with weaker demand projections, should push the market balances into surplus. Moreover, our economists’ models still peg the probability of a US recession beginning within the next 12 months at more than 40% at the moment, meaning we cannot rule out a deteriorating macro environment on top of these weaker fundamentals.

When do you think copper prices are going to start to rebound, in accordance with the demand forecasts for the following decades due to the electrification of the world’s economy?

We think the first major signs of electrification will likely begin to sustainably influence copper prices around the middle of next decade. Not only will you possibly be in the early stages of the next business cycle by that time but electric vehicles will likely be approaching a bit of a tipping point. Even with our relatively more bearish-than-consensus assumptions on EVs—our models incorporate only around 6% sales penetration of pure battery electric vehicles globally by 2025 vs market consensus closer to 10-15%—we still see the potential for roughly 965 kmt of additional copper demand in 2025 from electric vehicles and accompanying infrastructure. Especially as the pipeline of new mines coming on-stream should dwindle somewhat the later we get into next decade, this additional demand could prove influential. The one area of caution we typically flag is that at this same time (mid-2020s) growth from traditional Chinese demand sources will likely be in the process of shifting more meaningfully lower, meaning at first the boost to copper demand from electrification will largely just keep overall demand relatively steady rather than substantially accelerating demand growth. However, this effect should eventually fade more and more as popularity of EVs likely continues to grow later into the decade.

Gregory C Shearer | Vice President | Global Commodities Research | Investment Bank | J.P. Morgan | Floor 5, 25 Bank Street, Canary Wharf, London | T: +44 (0)207 1348161 | gregory.c.shearer@jpmorgan.com | jpmorgan.com