Copper price jumps on China policy pivot, but market has seen it before

Copper jumped on Monday, rising by more than 2% overnight to a four-week high of US$4.30 per lb. (US$9,470 per tonne) on the CME in Chicago, after China’s politburo signalled for the first time since 2008 it is abandoning its “prudent” monetary policy stance. 

But optimism about the impact of a “moderately loose” policy and promises of “vigorously boosting consumption” faded in afternoon trade with March futures giving up some gains towards the end of regular trading.

The bellwether metal spiked at the end of September after similar positive noises about economic stimulus from Beijing, but remains down nearly 10% since then.

In a new note, London-based researcher Capital Economics warned that ”monetary easing in China is far less potent than it used to be [and] there is now limited appetite among households and large parts of the private sector to take on more debt, even at lower rates.”

Capital Economics says that with monetary policy effects likely to be underwhelming, Beijing’s fiscal policy would have to do the heavy lifting: “Our calculations suggest that the share of on-budget spending being devoted to investment is on course to hit its highest since 1987 this year.”

Rising fixed investment in China on this scale is an unalloyed good for metals markets and especially copper given its widespread use in industry, manufacturing and construction. 

Even so, Capital Economics in a September research report argued that a correction in Chinese construction activity “will be as large as 50% decline from peak to trough” and that most of the correction still lies ahead:

“While the green transition and Al-related use will boost demand for industrial metals over the rest of this decade, we expect this to largely be offset by a substantial contraction in demand from China’s construction sector. 

“Against this backdrop, and with supply proving resilient, we forecast copper and aluminum prices to fall in the coming years and be below consensus expectations during the 2020s.”

Capital Economics forecasts copper would lose touch with the US$9,000 a tonne level next year, average only US$8,000 by the end of 2026, and continue to drift lower through 2030.