Copper price rally could be short-lived, analyst says

Copper prices surged to their highest levels in nearly three months on June 11, reaching US$5,801.5 per tonne (US$2.63 per lb.) on the London Metals Exchange (LME), up almost 20% from a low of US$4,854 per tonne (US$2.20 per lb.) on March 5, when commodity markets started to free-fall due to the Covid-19 pandemic.

A ramping-up of demand from China, the top consumer of the red metal, is now fuelling price increases after the country eased lockdowns and travel restrictions that were imposed to combat the outbreak.

The resumption of the Chinese economy has been a central factor in the improving prices of recent weeks. However, price movements will depend on how much China’s domestic demand can hold up as it waits for the export market to return.

“Chinese plants have been exposed to the export market through their downstream consumers and were impacted to a much greater extent than those who mainly serve the domestic market,” Eleni Joannides, principal analyst at Wood Mackenzie, said in an email.

Imports of unwrought copper and copper products to China, for instance, rose 21.1% year-on-year after falling by 5.5% year-on-year from April to 436,031 tonnes, S&P Global Platts reported on June 9. The London-headquartered energy and commodities analyst attributed this to weak seaborne demand caused by the spread of Covid-19 outside of China and the recovery in Chinese domestic demand.

The Asia metals correspondent for Reuters, Mai Nguyen, noted that copper prices on the Shanghai Futures Exchange (ShFE) jumped to their highest level in nearly 20 weeks on June 10, rising to RMB 46,980 (US$6,632) per tonne, their highest since January 23.

On June 12, weekly ShFE inventories declined 8.4% week-on-week to 128,000 tonnes, their lowest since December 2019, according to Bloomberg. Meanwhile, the LME cancelled on-warrant copper stocks increased to 109,000 tonnes, the highest since October 2109, the news agency reported on June 12.

Fiscal stimulus packages from global central banks, particularly the U.S. Federal Reserve (US$2.3 trillion) and the People’s Bank of China RMB 4 trillion (US$559 billion), are also fuelling demand for the red metal.

Although copper prices are benefiting from the stimulus packages, Natalie Scott-Gray, a senior metals analyst with INTL FC Stone in London, believes that they may not be enough to support prices.

“Short-term we have already seen a huge rally in copper prices,” Scott-Gray said in an email. “But I believe this [price] to be massively overinflated, and I expect we will see copper prices turn downwards in the next quarter quite substantially, but I do not think we will see a lower-low this year though.”

In the longer-term, however, Scott-Gray believes that although the outlook for copper markets is bullish, the demand for copper from the rest of the world in unlikely to return to 2019 levels for years to come, restricting prices.

“While the Chinese stimulus package, at 6.1% of GDP, will help to raise GDP growth in the country, it was far less than expected,” She said. “A sense of disappointment was felt in the metals market, which also stems from less direct spending on traditional infrastructure ‘metal heavy’ projects.”

Included in the Chinese stimulus package were subsidies and tax breaks for new energy vehicles (NEVs), which include battery-powered electric vehicles (EVs), plug-in hybrid EVs and fuel cell EVs. The incentives aimed to support China’s goal of increasing the domestic market share of NEVs from 5%, in 2019, to 25% in the next five years.

According to the Copper Development Association, battery-powered EVs contain around 183 lb. copper compared with approximately 18 to 49 lb. for conventional cars.

“Although the long-term electrification is going to be massively bullish for copper, this year the EV market was hurt significantly, Covid-19 aside.” Scott-Gray said. “Overall, moves from China last July to cut subsidies resulted in a 10-month consecutive decline in NEV sales.”

Now that subsidies are stricter in range and cost parameters, NEV sales are likely to decline, which is the current trend even without Covid-19, she added.

Even with the ramping-up of manufacturing, Scott-Gray added, this long-term trend is “worth keeping in mind.”

The failure of the U.S.’s stimulus package to provide relief for the EVs market, the lowering of fuel efficiency standards, from 5% to 1.5%, by U.S. President Donald Trump, and the impact of Covid-19 on retail spending, suggests a negative “outlook for big-ticket items like cars, let alone EVs,” she noted.

The lockdowns have also impacted the scrap copper markets, disrupting both the generation and collection of copper scrap and the flow-through the consumers.

“We are now also starting to hear that scrap merchants are worried about the prospect for future supplies,” Wood Mackenzie’s Joannides said. “Some scrap yards in key countries of supply, such as the USA, have closed their operations as a result of the [coronavirus] outbreak, and industrial generation in certain sectors, including the hard-hit automotive and aerospace sectors, has ceased, increasing the risk that supplies could dry up.”

As economies start to revive, the volume of scrap copper coming to the market will depend heavily on the recovery of the industrial sector. Still, the supply of scrap copper, she notes, will likely remain a challenge for some time to come.

Disruptions to the supply of mined copper are also supporting an uptick in prices, Joannides added.

“The total volume of mine disruptions we have identified for the year-to-end May is around 670,000 tonnes, or 3.1% of our initial production estimates, with the bulk of this directly attributable to the coronavirus and with over 60% of the total related to mines in Peru and Chile.”

Using data provided by CRU International, analysis by Scott-Gray shows that disruptions to mine production from Covid-19 have negatively impacted global copper supply, leading to losses of around 434,000 tonnes worldwide and a further 159,000 tonnes from cutbacks in mine production.

Production losses were highest in Central and South American mines at around 358,000 tonnes as the region became the latest Covid-19 hotspot, Scott-Gray notes.

In particular, Chile, which accounts for approximately 28% of global production, has seen a reduction in output of about 1% annual production compared with a forecast rise of 4.1% year on year due to the pandemic, the Chilean Copper Commission reported.

The output from Peruvian mines declined over the first quarter by 12.2% year on year, a loss of around 72,000 tonnes, Scott-Gray added, with production losses in April of 65,000 tonnes, a year-on-year fall of 34.7%, with the losses attributable to not only Covid-19 but also ongoing protests at MMG’s Las Bambas copper mine.

“Given that the region contributes to 40% of total global mine supply, there remains an ongoing risk to production forecasts for the remainder of the year,” Joannides said. “However, in most cases, mining has been deemed critical, and there has been a gradual ramp-up of activity through May.”

Production losses at North American mines accounted for around 191,000 tonnes, Scott-Gray notes, with Asian mines accounting for 26,000 tonnes, African mines 14,000 tonnes, European mines 3,000 tonnes, and Australasian mines 1,000 tonnes.

Her analysis also shows that disruptions in smelter operations also led to an additional loss of 198,000 tonnes, with Asian smelters accounting for 86% of total losses.

“Unless there is a significant uptick in cases from a second wave of the virus, then the impact on copper prices from mine production losses has mostly played-out,” Scott-Gray said.