Is current copper rally for real this time?

Copper’s aggressive advance in the week since Donald Trump was elected president of the United States suggests investors are more bullish about growth than they have been in years, but strategists wonder if the rally is for real.

The metal used in cables and wiring jumped to a 17-month peak as high as US$2.53 per pound after Trump’s victory on hopes he’ll make good on commitments to ramp up in construction in the U.S.

After reaching a peak close to US$4.50 in 2011, prices have languished around the US$2 mark for the past few years, largely due to excess supply in a slow global growth environment.

Now, copper prices are up 20 per cent since this time last year — with about half of that boost added since Trump was elected president on Nov. 8.

Copper contracts for December delivery were down slightly from highs earlier this past week, closing Friday at US$2.46 per pound, as the U.S. dollar reached a nearly 14-year high against a basket of other currencies. The strong greenback makes copper more expensive because contracts are priced in that currency.

Investors are encouraged by Trump’s US$500-billion to US$1-trillion infrastructure spending plan to rebuild crumbling American bridges, airports and roads. But strategists say the plan’s vagueness, the relative unimportance of the U.S. in the copper market (as compared to China) and copper’s fundamentals — including a global supply surplus — do not support the US$2.50 price tag. They point to between US$2.15 and US$2.30 as a more realistic range.

“Right now we’re just buying the sizzle rather than the steak,” said John Stephenson, president and CEO of Stephenson & Co. Capital Management.

Trump’s campaign rhetoric has been “inflationary growth-oriented” overall — from his promises to deport millions of workers, which adds to wage pressures, to his anti-trade policies, as invoking tariffs on imports will lead to costlier domestic goods.

“That’s why you see copper moving because it would be used for these infrastructure projects. But it mainly benefits because you see this inflationary, pro-growth trend going forward, so it benefits real things in a big way.”

However, he thinks the market is getting ahead of itself in its enthusiasm for a copper rally that is hard to justify given that fundamentals haven’t changed. “All that’s changed is the rhetoric around infrastructure.”

A more sustainable price, he believes, is around US$2.15 per pound.

A recent survey of 22 investment banks and commodity research organizations by Focus Economics suggested they are skeptical about the longevity of the rally. None of those surveyed predicted copper rising above the current spot price in the final quarter of the year. The consensus call for the final quarter of 2017 is closer to US$2.29 a pound.