Scrap prices signal copper is no longer choked by its secondary market
April 4, 2024
Key Observations:
Prices for a variety of scrap copper products declined worldwide throughout 2023. By October 2023, many of these prices were at levels consistent with prior cyclical lows. The ready availability of secondary supply to meet marginal demand was a lasso around the primary markets that are basis for the refined copper futures contracts in London, New York, and Shanghai. This constraint on futures prices in turn dragged miners' share prices 20%+ off their highs.
But the outlook for both copper futures and the associated equities has been brightening over the past few weeks. Price action in scrap copper prices worldwide suggests that the pickup in global manufacturing activity is sufficiently robust to tighten the secondary balances. The z-score for the scrap price depicted at right has moved from –1.2 (Mar 6) to –0.94 (Apr 2) to –0.75 (Apr 3). The z-score for the prompt Shanghai copper futures price has moved from +0.77 (Mar 6) to +1.22 (Apr 3). Improvement is quickening.
The watchword for equity investors is operating leverage. Dec-24 LME copper (LPZ4) is up 13.6% from its 2024 ytd low. Share prices for copper miners are beating that futures' return by several multiples:
Price change from ytd trough as a ratio to price change in LPZ4: Ivanhoe (IVN CN, 2.0x), Antofagasta (ANTO LN, 2.5x), Freeport (FCX, 2.6x), First Quantum (FM CN, 2.9x), Southern Copper (SCCO, 3.1x), Lundin (LUN CN, 3.4x).
Source: Bloomberg, Blacklight Research. Note: CU1 is the rolling continuous prompt futures price for copper on the Shanghai Futures Exchange (SFE). The Global X Copper Miners ETF (COPX, $44.37) made a fresh 52-week high yesterday. Marketcap is US$2.05 billion.
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