Explained: Why copper prices could fall further after four-month low amid US election outcome

Copper prices recently fell to their lowest level in four months, dating back to July. This drop occurred because the US midterm election outcome cast fresh uncertainty over two key drivers behind the metal's rally earlier this year: the rapid expansion of data centres and the prospect of higher US import tariffs.

The weakness in copper came amid a broader selloff in industrial metals, following a massive decline on Wall Street last week after the Democrats swept the US midterm elections, delivering a major rebuke to President Donald Trump and his administration.

However, prices rebounded slightly on Monday. Copper prices recovered on Monday following last week's sharp selloff, supported by lingering supply concerns in top consumer China. However, uncertainty over the implications of the US midterm election outcome for import tariffs and artificial intelligence (AI) infrastructure demand continued to weigh on the metal.

Three-month copper on the London Metal Exchange (LME) rose 0.81% to $13,880 a metric ton. Meanwhile, the most-traded copper contract on the Shanghai Futures Exchange (SHFE) gained 0.68% to 107,650 yuan ($16,124.93) a ton.

The election outcome has put both pillars of copper's recent rally under scrutiny. Expectations of a massive data centre expansion over the coming years had fuelled optimism about demand for the metal, which is widely used in cables, wiring and power equipment required to build and operate these facilities.

At the same time, the possibility of higher US import tariffs had provided additional support to prices. Expectations of tariffs had kept copper prices in the US at a premium, drawing large volumes of the metal into American stockpiles and tightening supplies in the global market. However, that price differential disappeared on Thursday, removing another source of support for the metal.

More downside ahead for copper?

TD Securities believes copper could face further pressure as the Democrats' gains in the US midterm elections weaken expectations of import tariffs and raise questions over the projected demand from data centres.

"We continue to expect the red metal to face further downside from here," Mining.com cited TD Securities managing director and global head of commodity strategy Bart Melek last week.

The brokerage warned that copper could lose some of the support provided by US stockpiling before the anticipated growth in data centre consumption begins to materialise. However, mine disruptions and tight supplies outside the US could limit the extent of the decline, according to Fitch Group's BMI research and data unit.

Why copper prices had rallied earlier

Copper's strong run earlier this year was backed by a combination of rising structural demand and persistent supply constraints. Electrification, artificial intelligence, defence spending and urbanisation across emerging markets have accelerated demand for the industrial metal.

At the same time, limited supply created a market environment where robust long-term consumption is running up against constrained production, potentially pushing baseline market-clearing prices higher.

The Iran conflict added another layer of pressure to an already tight supply environment. One less-discussed factor supporting the recent rally has been the growing shortage of sulfuric acid, a critical input in copper extraction and refining, particularly in heap leaching operations.

Nearly half of the world's seaborne sulfur supply originates from the Middle East, while disruptions around the Strait of Hormuz have further restricted availability.

Supply concerns have also been highlighted by developments in Chile, the world's largest copper producer. The country reported its weakest second-quarter copper output in at least 19 years and has lowered its full-year production forecast for the second consecutive quarter. Chile now expects production to decline 2.6%. Meanwhile, the International Copper Study Group estimates that global mine supply will grow 1.6% this year.

Last month, Deutsche Bank said the copper market is entering a phase where the biggest concern is no longer how quickly demand is growing, but how much metal is actually available to meet it.

With global copper inventories at historic lows, Deutsche Bank says the market is moving away from a "demand-driven" dynamic towards a "supply liquidity crisis", as buyers compete to secure an increasingly limited pool of spot supply.

Analyst Daniel Ghali calls the current environment a "historic scramble for metal" and expects copper prices to climb to $22,050 per metric ton by the second quarter of 2027, more than 50% above current levels.

Ghali warns that the squeeze could become even more pronounced if stockpiling continues at the current pace. Under that scenario, copper supply available to other global users could be exhausted by late 2028. There is, however, a mechanism that could eventually ease such an extreme outcome: higher prices.

According to Ghali's latest analysis, the market is facing several pressures simultaneously: continued US stockpiling, further restocking demand, significant disruptions to refined copper supply and an unexpectedly tight global supply-demand balance.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.