The Copper Monthly Metals Index (MMI) moved sideways from August to September as the index rose 1.13%. Copper prices remain steady.
Copper prices began to slide at the beginning of September. After they caught a temporary bounce in late summer, prices began to break through short-term lows, which indicates potential for further price declines. Markets remain highly volatile amid competing macro economic pressures.
Energy Crisis Threatens Europe’s Metal Sector
Although energy-intensive metals like aluminum and zinc production remain most at risk from soaring energy prices in Europe, the gravity of the crisis appears capable of threatening the continent’s entire metal industry.
According to Guy Thiran, Director General of the European non-ferrous metals trade association Eurometaux, “European metal producers are already preparing for a life-or-death winter.” Thiran went on to say, “any further reduction of European metals production risks being permanent, threatening job losses and knock-on impacts on a complex web of essential and strategic EU value chains – from medical equipment and critical infrastructure to automotive and aerospace.”
Impact on Copper and Copper Prices
For copper, the energy crisis presents three primary challenges. High energy prices will immediately translate to increased input costs for European producers. Roland Harings, CEO of Europe’s largest copper producer Aurubis AG, told investors those costs would be eventually passed down to consumers.
For this year, Aurubis hedged roughly two-thirds of its electricity costs. However, Europe’s crisis will likely not be resolved in the near term, which would mean prices could see sharp increases by next year. While copper ingot prices have declined since late August, European-sourced products will likely begin to carry a premium over their global counterparts. Over time, this could lead to a deterioration of Europe’s role within the global supply chain.
Secondly, consumer price pressures will continue to weigh on demand and copper prices. For the second consecutive month, the Eurozone Manufacturing PMI remained in contraction territory in August with a score of 49.6. This represents the lowest reading since June 2020 and was dragged downward by a sharp contraction of new orders.
Some European businesses have already noted a three-fold increase in energy bills just this year. According to Goldman Sachs, average monthly household energy bills in Europe could rise from 160 euros in 2021 to 600 euros in 2023. Increasingly less affordable energy prices ahead of and into the winter months will likely lead the continent into a recession. Continued demand declines will have a downward effect on prices.
Europe Feels the Energy Crisis Strain
Lastly, as has already occurred with numerous aluminum, zinc and steel producers, shutdowns remain a possibility. Harings noted this as a worst-case scenario outcome in his comments to investors and suggested any such shutdowns would be “very controlled.” Aurubis continues to lobby politicians and regulators for capped energy prices, which could insulate the industrial sector from the current crisis. How the sector fares as a whole will largely depend on whether or not European countries adopt a protectionist approach to such industries as it manages limited energy supplies.
Chile Rejects New Constitution
In a historic Sept. 4 referendum, Chilean voters overwhelmingly rejected the new constitution. A resounding 62% of voters and all 16 regions of Chile voted to reject the document. How will this effect copper prices?
A vote to approve the new constitution would have likely added support to prices amid the current market uncertainty. Most bull narratives for copper are underpinned by waning supply against growing demand. This is largely due to the green energy movement. While annual copper output within Chile remains within a downtrend since 2018, the new constitution would have increased mining restrictions and impeded foreign mine investment. Chile accounts for roughly 28% of global copper output, which makes it the largest copper producer in the world.
The rejection means the market dynamics will remain unchanged within Chile. In a broader sense, it could also indicate collapsing momentum of the leftward swing within Chilean politics. President Gabriel Boric vowed to work with Congress for a “new constitutional process.” With such a resounding defeat, however, this will likely mean any future drafts will be far less progressive.
By AG Metal Miner
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