Copper Entered a Bear Market Last Week
Copper prices have plunged from a high of $4.80/pound in early March 2022 To $3.85 on June 29, 2022. That’s a drop of 20%, which puts copper into an official bear market (alongside stocks).
As you can see from the chart below, $3.85 is still pretty high. However, the concern is that a recession could pull prices down further, as often happens. For instance, in January of 2020, copper prices were at $2.85. By March 23, 2020 (at the bottom of the pandemic), the cost sank to a low of $2.10/pound. Prices didn’t stay there long and were back to $3.00 by September. However, the Pandemic Recession was the shortest contraction in history. In December of 2008 during the Great Recession, copper prices plunged to $1.30/pound. They didn’t return to $3.00 until September of 2009.
How will Chile and Peru (the #1 and #2 copper producers in the world) fare in 2022? What about the world’s copper producers, including Freeport-McMoran?
Goldman Sachs: “Copper is the New Oil”
On May 4, 2022, Goldman Sachs issued a report, writing, “As the most cost-effective conductive material, copper sits at the heart of capturing, storing and transporting these new sources of energy. In fact, discussions of peak oil demand overlook the fact that without a surge in the use of copper and other key metals, the substitution of renewables for oil will not happen.”
If the world is moving toward net-zero and clean energy – and away from fossil fuels and oil – why aren’t copper prices surging? As we’ve seen in past contractions, it’s the fear of a recession where consumers and businesses are forced to rein in their spending.
Recessions Drag Everything Down
A recession is already happening in Russia, Belarus and Ukraine. The rest of the world isn’t in a recession yet. However, the U.S. economy contracted in the 1st quarter by -1.6%, and full-year GDP estimates have dropped to 1.7%.
Few economists forecast a recession before it happens. However, former Treasury Secretary Lawrence Summers has gone on record with a bold prediction that “a recession is almost inevitable” within the next two years and likely sooner rather than later (source: Bloomberg TV on June 24, 2022). Jerome Powell’s new definition of a soft landing (which skirts the mention of avoiding a recession) is as close as the Feds are going to get with a recession prediction before it shows up.
As we see in the chart above, in the early stages of a contracting economy, copper can go down, as can other safe haven strategies, like gold, silver and even cryptocurrency. (Crypto tanked with stocks in the early days of the pandemic.) However, as the world rebuilds, copper is key. So, just as in previous recessions, near-term, downtrending volatility can be replaced by a Shoot the Moon trajectory.
2023 Should Look Better Than This Year
The need for copper in a cleaner world should ultimately play in the favor of the world’s number one and two copper producers: Chile and Peru. However, in 2022 with a 21% reduction in copper prices, both countries may struggle to recover from the pandemic overhang, and the social unrest that is inherent in the region. Bloomberg reported earlier this year that Chile is on a path to nationalizing its copper and lithium mines.
GDP expectations in 2022 are only 2.5% for Peru – down from 13.3% last year. Chile’s GDP predictions are a mere 1.5% in 2022 (down from 11.7% in 2021). While expectations were outstanding for both countries in 2021, this year, we’re taking Chile off the hot country list (due to the potential for nationalization) and underweighting Peru.
Freeport Mc-Moran reported an increase in revenue of 73% in the 1st quarter of 2022. Freeport 1Q 2022 revenues were $6.6 billion with an average price of $4.66/pound. The comps for the 2nd quarter, which should be announced around July 21, 2022, will likely be flat year over year, and could be down. The outlook for copper is ultimately bright and shiny, but could be tarnished in the near term, which is why FCX stock is down -43% off of its 52-week high.
McEwen Mining is a junior mining company with a large copper project in development in Argentina. The company is still in the preliminary economic assessment phase, with plans for an Oct. 2022-June 2023 drilling season and an IPO for McEwen Copper (which is 81% owned by McEwen Mining) in the first half of 2023. This is a company that has flown under the radar of investor attention for quite a number of years. However, once copper heats up again, investors should become more interested in a small company with such large copper resources.
Copper is essential to our modern lives, and to a cleaner, greener world. However, as the world’s economies slow down and contract, demand for essential metals, like copper, drop, along with prices. These tend to be the first to recover, and robustly, once rebuilding begins. Protecting and diversifying assets, with an eye on the horizon, is the most rewarding strategy in uncertain and volatile times.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.