Copper Futures Prices Diverge from Spot Prices, Citi Sets A Two-Year Target

Copper holds a significant position in financial markets as an indicator of economic health.

Dubbed “Dr. Copper” due to its ability to forecast economic trends, the recent divergence between copper futures prices and spot prices has caught the attention of investors looking to profit from growing volatility due to this metal's vital importance in clean energy.

The gap between the current (“spot”) price and the future or forward price, typically observed three months in advance, has widened significantly, crossing the $100 mark. This phenomenon, known as contango, indicates that future prices (futures contracts) are higher than current prices (spot).

The most infamous instance of contango occurred in the spring of 2020 when oil futures prices plummeted into negative territory.

This historic event, witnessed on April 20, saw prices for May contracts nosedive from +18 to -37 dollars per barrel. Such extreme contango, or even a “supercontango,” signifies an unprecedented market imbalance. Now, copper finds itself in a similar state of contango, not witnessed since 1994 (as far as the data goes).

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Analysts interpret this divergence in two scenarios. First, it could signal bullish sentiment towards copper, indicating expectations of robust economic growth in the future. Future growth translates into higher demand and, therefore, a higher future price.

Second, it could indicate a short-term oversupply situation, a concern which is less likely given the recent Chinese smelter agreement to undergo rare joint production cuts.

Despite the volatile market dynamics, experts remain optimistic about copper’s long-term prospects. Citi, for instance, has an optimistic view, citing positive demand-supply dynamics.

"We are strongly recommending investors have a position in copper, and we are strongly recommending that consumers of copper hedge their exposure over the next one to three years. I mean, it’s on a path to $12,000. There are so many different ways to get there over the next two years, but that’s where it’s headed," Max Layton, Citi's Global Head-Commodity, told CNBC.

Copper futures closed the day at $8,930 per metric ton.

As copper prices continue to reach new highs, less-known stocks are coming into the spotlight, experiencing gains often associated with and not state-run enterprises. For example, Hindustan Copper, a $3.3 billion Indian state-owned mining company, achieved a 215% return over the last 12 months.

Such opportunities will unquestionably exist in the commodity cycle; however, market participants need to pay close attention to the aforementioned scenarios. Despite both having a bullish bias towards copper and other critical metals, they could have fundamentally different impacts on the broad market.

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