Are Copper Markets About To Feel The Weight Of A $2 Billion Stockpile?

The price of copper has been dropping amid concerns of weakening global demand. Daniel Ghali, Senior Commodity Strategist at TD Securities, discusses how the resolution of a royalties dispute could mean even more supply may soon be added to global markets.

Transcript

Greg Bonnell: Concerns about China's recovery have been weighing on copper prices. We also have worries about too much supply, so take a look what's been happening in copper in recent weeks and months - definitely a downward trajectory. My next guest says copper markets may be about to get crushed by a $2 billion stockpile suddenly being added. We're joined now by Daniel Ghali, Senior Commodity Strategist at TD Securities. Daniel, always great to have you on the program. We throw out a phrase like that, $2 billion stockpile, we got to start there. What's going on?

Daniel Ghali: Well, thanks Greg, and thanks for having me. The $2 billion stockpile has been, in my view, kind of an underreported story, but that's surprising because it's potentially a game changer. What we're talking about here is a stockpile out of the DRC, which results of the resolution of a royalty dispute between a mining company and the government, which essentially shut down, or shut down exports from the mine for more than a year. As a result of that, the mine has been stockpiling copper and that's just been really sitting there.

And that's of the tune of 200,000 tons. That's about 1% of global supply, which when I say it that way, doesn't necessarily sound like a lot, but it's enough to shift the market balance from an expected deficit to an expected surplus. Not to mention the fact that the mine is now operating as well, so you do have a lot of copper coming out of there, and it's coming out of there at a time that the market doesn't actually need it. Demand is contracting, and supply from other regions is growing.

Greg Bonnell: All right. So eyes on the Democratic Republic of Congo with all this copper supply they have. At the same time, you said the world doesn't need this right now. Heading into this year, a lot of talk about China's reopening, the dropping of the COVID restrictions, how hungry they would be for the materials that the world has to sell to them, including copper. Hasn't panned out. What's happening there?

Daniel Ghali: No, absolutely. China's reopening has been a complete bust. Earlier this year, there was a lot of optimism about China's reopening, that it would fuel a boom in demand for commodities. And we were always skeptical of that because it's not necessarily a broad-based implication. What we saw very early on is that China's reopening did fuel a boom in demand for energy products. That's a result of people wanting to travel, tourism, international flights restarting out of China. But when it comes to the manufacturing sector, it was never going to be a game changer for the country. The property sector is weakening. The manufacturing sector is weakening once again, and that's a result of weakening demand in the West.

Greg Bonnell: Let's talk about that, then-weakening demand in the West. We have been worrying about a potential recession for quite some time now. Obviously, perhaps this market's reflecting that those worries continue?

Daniel Ghali: I do think so. Again, earlier this year, the reopening optimism really fueled the rally in copper prices at a time when supply was disrupted. Today, we see evidence that demand is declining, not only in China, but also in the West, and that's certainly what copper prices are starting to reflect. In fact, when you consider the idea that the West was weakening, people were thinking that China was going to offset that, but time and time again, the old adage that when the US sneezes, the rest of the world catches a cold sounds true, and that's kind of what we're seeing today again.

Greg Bonnell: Before we move off copper, I want to ask you one thing, though. Longer term, we hear about copper, copper, copper because you need it for electrification of vehicles. You need it to generate electricity. Longer term, what are the thoughts on copper?

Daniel Ghali: Well, in the longer term, that's really what's interesting. That's what has attracted a lot of speculative interest in copper. People are just waiting to buy it. And the reason being that when you look on a 10-year horizon, there just doesn't -- there is not going to be enough supply to satisfy the amount of demand growth that we expect from the electrification boom. This is one of the dominant themes of this coming decade, and certainly is going to translate into a notable impact for prices.

Greg Bonnell: That's a great breakdown on what's happening with copper right now-short, medium, and long term. What about gold? I mean, when it got above $2,000, it stayed there for a while, got a lot of interest. You came out with a note recently entitled, Time, Selling Exhaustion in Precious Metals. What's that telling us?

Daniel Ghali: Yeah. I mean, gold has come off already nearly more than $150 an ounce. So it's quite a substantial pullback that we've seen already in prices. But that note that you referenced gives the idea that we actually think selling exhaustion is imminent, that the selling flow that we've seen thus far is probably running out of steam, and the reason being that there's a misconception, I think, of what positioning looks like out there.

People think the whole world is bullish gold, but the reality is, when you strip out algorithmic trend followers who have been one of the major buyers of gold in the recent rally, you're left with discretionary traders who are pretty much flat on gold. That's surprising in the context of a recession looming on the horizon.

Greg Bonnell: This is an interesting one that you watch Google searches. I mean, it is what people are interested in, the phrase, how to buy gold, on a Google search. What do you see in there?

Daniel Ghali: That's been a really interesting insight. It's helped us to track retail demand for gold, which absolutely exploded in the aftermath of the banking crisis out of the US and Europe. More recently, we've seen that come down substantially, and that's corroborated by the premiums we see in physical markets, that retail demand for gold is coming off, potentially because there is some sense of calm when it comes to the banking sector.

Greg Bonnell: If you had to have a take on gold and where it could be headed, what would it be?

Daniel Ghali: Well, by the end of the year, we're expecting gold prices around $2,100 an ounce, so we do have some upside there, particularly as we head into recession and as the outlook for Fed cutting regime starts to firm.

Greg Bonnell: Okay. It'll be an interesting second half of the year. Daniel, always a pleasure to have you here.

Daniel Ghali: Thank you, Greg.

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