Once again, there is a resurgence of optimism among investors in copper at the London Metal Exchange. The price of the 3-month contract, which fell below $8000 per metric ton in late 2023 due to a decline in Chinese GDP, ended above $9700 on Wednesday. Currently, it has experienced an increase of almost 13% since the start of the year. BHP, a leading global mining company, has recently announced its intention to acquire its competitor, Anglo American, a major player in the copper industry.

These factors are logically connected due to expectations for a more robust economic recovery in China, the worldwide growth of the green technology industry, and the challenges faced by the mining sector in South America. However, copper is not entirely a foolproof investment as it may initially appear.

The robust copper demand in China may not be as stable as it appears, particularly due to the increasing surplus in industries heavily reliant on copper, such as solar and electric cars. The volatile political situation in Panama has the potential to disrupt the supply dynamics, leading to a return of surplus in the market. Moreover, considering the unusually elevated stockpiles in China, even a slight decrease in demand might have a significant impact on global prices.

Undoubtedly, copper is currently experiencing favorable conditions due to actual forces of supply and demand. The anticipated recovery in manufacturing in China, which has been eagerly awaited, along with the unexpected resilience of the American economy despite rising interest rates, could both contribute to an increase in demand. Additionally, the decrease in production by multiple mining companies and the extended shutdown of a major copper mine in Panama are negatively impacting the supply.

Citi anticipates that there will be a higher demand for copper than the available supply this year, resulting in a deficit of one million metric tons over the next three years. Morgan Stanley predicts a shortfall of 700,000 metric tons in 2024.

China, the largest consumer of copper globally, has experienced a significant increase in demand for the metal in the latter part of 2023 and early 2024. According to Morgan Stanley, copper consumption in China has risen by an average of 18% each year over the past five months.

One factor driving the demand for copper is the energy transition, which relies heavily on copper and demands significant investment in electrical infrastructure. The bank reports that China’s production of electric vehicles experienced a significant growth of about 30% compared to the previous year in early 2024. According to data from CEIC, China experienced a significant increase of around 60% in its installed solar photovoltaic capacity in 2023.

This is assisting in compensating for the lack of demand in the housing sector: The number of finished projects in the country’s suffering real estate sector decreased by more than 20% compared to the same period last year in the first two months of 2024.

Based on the evidence presented, it appears that the bulls have a strong case. However, there are still a few crucial factors that have the potential to go awry.

Firstly, the rate of increase in supply could exceed expectations in a positive manner. If the Cobre Panama mine does not reopen, Deutsche Bank predicts that copper demand would exceed supply by approximately 3% next year. Nevertheless, according to the bank’s analysis, if the mine were to commence operations in the beginning of the next year, the market would see an excess supply of 1.8%.

Furthermore, there is a possibility of Chinese demand falling short of expectations, as it has repeatedly done in the past 18 months. Given the stagnant nature of the Chinese real-estate market, the demand for copper in China is now heavily reliant on investments in the energy sector, as well as the production of copper-intensive machinery such as electric vehicles (EVs) and air conditioners. According to Wood Mackenzie, investment in China’s electrical network constituted 37% of total demand last year, while appliances and machinery contributed for an additional 30%.

One concern is that the Chinese manufacturing capacity for certain copper-dependent products, particularly solar panels and electric vehicles, has expanded to such an extent that the global market may have difficulties in accommodating them. Consequently, it is possible that both the development of Chinese production and the demand for copper will have to decrease. According to David Oxley, the chief climate economist at Capital Economics, China is expected to manufacture 500 gigawatts of surplus solar panels this year, which is about four times the amount of new solar power that will be installed globally in 2023.

China’s domestic power sector, which is currently the largest contributor to national copper demand, is facing similar uncertainties. According to data from CEIC, the investment in electricity and heat experienced an astonishing growth rate of 36.7% year over year in the first quarter of 2024, marking the highest rate of expansion since 2005.

If there were any reasons causing a decrease in speed, such as budget limitations or connectivity problems due to the large number of new solar panels being installed, China’s need for copper would be significantly affected. China’s fiscal policy is expected to become more expansionary this year, however, its local governments are still grappling with significant debts and the consequences of the property crisis.

Copper is poised for a promising future, however the path to success is likely to be non-linear. In 2024, the imbalances in China’s economy and the potential impact of variables such as Cobre Panama could potentially disrupt the mining industry.