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Copper's supply crunch will drive prices to $13,000 or even $20K - Bank of America

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(Kitco News) - Copper's unprecedented run to a 10-year high of $10,000 per tonne on the London Metals Exchange (LME) could just be the start of a much larger uptrend, according analysts at Bank of America.

In a report Monday, the bank's analysts said that they could see copper prices rallying to $13,000 a tonne as the market continues to see a significant supply crunch and growing demand. Copper prices on the LME are currently trading at $9,932.50 a tonne , down 0.32% on the day.

The analysts noted that the copper supply, as measured by inventories in LME warehouses, is at its lowest level in 15 years. They added that stocks could currently cover 3.3 weeks of demand. 

"The fundamental backdrop is so concerning because the global economy is just now starting to open up and reflate," the analysts said. "With LME inventories close to the pinch-point at which time spreads can move violently, there is a risk backwardation, driven by a rally in nearby prices, may increase."

Bank of America said that the copper market is in a similar situation as nickel prices in 2006 and 2007.

"A lack of nickel in LME warehouses pushed nickel prices up by +300%," the analysts said.

But the growing supply imbalance in the marketplace isn't just a short-term problem. Bank of America said that it expects the supply crunch to get even worse in 2022. Analysts see the copper deficit growing to 185,000 tonnes this year and doubling to 369 tonnes by next year. Bank of America sees the market being balanced in 2023 with a surplus of 252 tonnes.

While mine supply of copper is expected to remain constrained in the next few years, BofA said that they expect to see a significant increase in recycled supply. They noted that secondary copper markets are smaller and more volatile, but they account for 25% of the market. The analysts added that the scrap copper supply could increase to 6,700 tonnes by 2025.

However, they added if this doesn't materialize, then prices could be on their way to $20,000 per tonne.

"If our expectation of increased supply in secondary material, traditionally a non-transparent market, was wrong, inventories could deplete within the next three years, giving rise to even more violent price swings that could take the red metal above $20,000/t ($9.07/lb)."

Although copper prices are expected to continue their upward trajectory, Bank of America does not expect that higher prices will impact global economic growth.

"Copper constitutes a relatively small share in the global economy," the analysts said. "Indeed, even if copper traded at $12,000/t ($5.44/lb) this year, its usage measured as a percentage of the global nominal economy would not exceed previous peak levels seen in 1970."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.