Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Copper Is Selling Off Despite the Energy Transition
Transcript
- Lucas: So copper is down another 2.2 percent this week, sitting at $6.34 a pound. That's a 3.6 percent drop over five days, and it's happening while the energy transition narrative is supposedly stronger than ever. Luna: Yeah, that's the part that throws me. Every time I read about copper, it's 'the metal of electrification, the metal of the future.' But the price keeps falling. What gives? Lucas: Right, there's a real disconnect here. And I think it comes down to copper having two competing storylines right now. One is the long-term structural demand story — electrification, AI data centers, renewable buildout. The other is the short-term cyclical reality: China's property sector is still in the doldrums, and that's where a huge chunk of copper demand lives. Luna: So which story is winning in the market right now? Lucas: The short-term one, by a mile. Look at the data from China: new home prices have been falling for over two years now, and copper-intensive construction activity is still muted. The market is pricing in that near-term demand weakness, despite all the big talk about green infrastructure. Luna: But isn't the energy transition real? I mean, we're seeing actual buildout — solar farms, wind turbines, EV charging networks. That all uses copper. Lucas: Absolutely, it's real. And it's growing. But the volumes from those sectors still haven't reached the point where they offset the slump in Chinese real estate. Copper demand from the property sector is down something like 15 to 20 percent from its peak. The growth from EVs and renewables is maybe adding 5 to 7 percent a year. So the net effect is still negative. Luna: That math makes sense. But then why do we keep hearing about a copper supply deficit coming? Are mines not producing enough? Lucas: That's the other twist. Supply is actually constrained — new mines are incredibly difficult to permit and build. There's a genuine medium-term deficit story. But deficits are about prices years from now. The spot market today is about what's happening right now, and right now demand is just okay, not booming. Luna: So the market is essentially looking past the deficit narrative and focusing on the weak near term. Lucas: Exactly. And you can see it in other metals too. Silver fell 7.4 percent this week, to $64.91. Silver has a huge industrial component — it's used in solar panels, electronics, you name it. So when silver drops that hard, it's telling you that industrial demand expectations are softening across the board. Luna: Yeah, silver is almost like a canary in the coal mine for industrial metals. When it gets hit that hard, it's not just about one metal. Lucas: Right. And then you have gold down 3.6 percent this week at $4,173. That's a bit more complex because gold has its own safe-haven dynamics, but the fact that gold and silver are both falling suggests something broader — maybe a reassessment of inflation expectations. Luna: Well, the 10-year breakeven inflation rate just ticked down to 2.25 percent. That's still above the Fed's target, but it's coming down. If the market thinks inflation is cooling, that could reduce the urgency to buy inflation hedges like metals. Lucas: That's a good point. The breakeven rate has been drifting lower since May. And if you combine that with the recent CPI print — May CPI at 334, up from 332.41 — inflation is still there, but it's not accelerating. So the fear premium that was propping up metals prices is fading. Luna: So for copper specifically, you've got the China property drag, the inflation expectations cooling, and the market just not buying the deficit story yet. Where do you see it going from here? Lucas: I think copper is going to stay range-bound until we get clearer data out of China — either a property recovery or a major stimulus package. On the supply side, we're seeing some mine disruptions in Chile and Peru, but nothing that's going to move the needle dramatically. The big catalyst would be if the AI buildout really accelerates data center construction, because those things use a ton of copper for wiring and cooling systems. Luna: Speaking of that, there was a headline this week about AI buildout giving tech investors new reasons to watch the bond market. That feels connected — if AI data centers need copper, and if financing costs for those projects depend on bond yields, then the whole metals complex is tied to interest rates. Lucas: Absolutely. And that's the kind of cross-asset thinking that commodity investors need to have now. It's not just about supply and demand of physical copper anymore. It's about how long bond yields stay elevated, how much capital is available for infrastructure, and whether the AI boom translates into real physical demand. Luna: Let's pause on that for a second. If someone is listening and thinking 'I want to understand this market better', honestly, this show has helped me connect those dots. And I know that the reason we can do this without ads or paywalls is because listeners support us. Lucas: That's true. We keep it independent, no sponsors, no editorial pressure. And it's entirely listener-funded. If walking through the economy with us has made something click, you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Luna: And we really appreciate it. It keeps us going. So back to copper — you mentioned AI data centers as a potential demand driver. How much copper does a typical data center actually use? Lucas: It's significant. A hyperscale data center can use anywhere from 10,000 to 30,000 metric tons of copper, mostly for power distribution and grounding. And with companies like Microsoft and Amazon announcing dozens of new facilities, that could add a few hundred thousand tons of annual demand within a few years. Luna: That's not nothing. But it's still small compared to China's construction sector, which consumes millions of tons a year. Lucas: Right. So it's a supporting factor, not the main event. The main event is still China. And until we see a meaningful recovery in Chinese property, copper is probably going to struggle to break out to the upside. Luna: What about the supply side? Any major outages or disruptions this week? Lucas: Not major. There was a small protest at a mine in Peru that got resolved quickly. But the bigger story is that many mines are operating at lower grades, so even if production stays steady, the amount of refined copper coming out might not increase much. That's a slow-burn issue. Luna: Slow burn is right. So for investors, what's the time frame? When does the deficit story actually start to matter for prices? Lucas: I think late 2026 or 2027. By then, the new wave of AI data centers should be coming online, and the energy transition is only accelerating. Plus, if China's property sector stabilizes by then, you could see a real crunch. But between now and then, expect volatility. Luna: And what about the other metals? We mentioned silver. Copper's drop seems to have dragged down the whole complex. Lucas: It does. And look at energy — crude oil is down 5.2 percent this week to $76.54, despite the Iran Strait of Hormuz headline. That tells you that demand fears are outweighing supply disruption fears for now. So it's a broad risk-off move in commodities. Luna: Yet gold is also down, which is unusual if this is truly risk-off. Normally gold rallies on uncertainty. Lucas: That's the nuance. I think gold is being pulled down by the falling breakeven inflation rate and a slightly stronger dollar. The risk-off is more about growth concerns than geopolitical fear. And growth concerns hurt industrial metals like copper directly. Luna: So the big question is: are we entering a demand-driven slowdown, or is this just a temporary soft patch? Lucas: I'd say soft patch, but we need to watch the data. The next few months of Chinese economic data and U.S. ISM manufacturing numbers will be key. If those turn up, copper could rebound quickly. If they disappoint, we could see further downside. Luna: Alright, so copper at $6.34: not a screaming buy yet, but not a panic sell either. Watch China, watch data centers, watch the dollar. Lucas: Exactly. And keep an eye on silver too. If silver stabilizes, that might be the first signal that industrial sentiment is turning. We'll track it and come back to it. Luna: Sounds good. That's it for this episode of The Commodities Economy. We'll be back tomorrow with more.