Copper Losing Steam amidst Dwindling Demand and Emerging COVID

Posted on 7th November 2020 by Dr. Hanish Kumar Sinha, Agri - Business Consultant, Ph. D. Agricultural Economics

The copper market has once again entered the consolidation phase after making a sharp recovery of over 30 per cent in the last six month. The market has slowed down and is again looking for concrete development after the confirmation of second wave of COVID in Europe and US which had again dimmed the demand scope and also casted shadow over the prospect of smooth supply. The physical demand for copper in China (which consumes over 45 per cent of the global copper supply) continues to be smooth in the post COVID era as the second phase of its spread is not visible in China. The country has so far imported 3.55 million tonnes of refined copper in the first nine months of this year. That’s already more than in 2019 and amounts to an extra million tonnes of metal compared to a year ago.

The global copper market is currently looking at the result of the US presidential election. In the market movement is fairly muted amidst expectation of uncertain result. While a U.S. stimulus package to aid recovery from the novel coronavirus pandemic may be harder to achieve, copper can probably look forward to on-going stimulus in top importer and consumer China, as well as in other leading economies in Asia. The positive result for Donald Trump may lead to a short term rally in copper prices as it would keep pressure on exports from Iran and Venezuela, both subject to U.S. sanctions. But, the win of the Democrats may lead to rationalisation of sanctions and more softer approach to the trading barriers. In the field of Electric Vehicles, the win for Biden is likely to speed up the adoption of EVs - both electric cars and electric trucks - and particularly those built by American automakers such as Tesla, Ford, and Rivian and also plans to spend $2 trillion on EV infrastructure as well as other green projects if he wins. This includes building over half a million charging stations by 2030, restoring the full EV tax credit. This is in contrast to Trump’s inhibitory and unclear policy directions. As per the current result scenario, Biden may win the House of Representatives but Senate may continue to be controlled by the Republicans which may hamper many efforts to stimulate the economy and promote clean energy and electric transport on a large scale. Thus the overall rise in the copper in automobile sector may experience a slowdown.

The copper mining continues to struggle with the COVID times in meeting to the recovery in the demand for copper. At its last meeting a year ago the ICSG forecasted a 2 per cent rise in mined copper production in 2020 but had to knock 700,000 tonnes from its forecast, producing the estimated deficit. The culprit is the impact of COVID infections in producer countries like Peru and Chile. The ICSG also cut 850,000 tonnes of refined metal from its last forecast. On top of this, global secondary production, which uses scrap as a feed has been hard hit, down 5.5 per cent this year as scrap collection, processing and logistics networks have frozen under national lockdowns and struggle to re-establish themselves. Much of this fall has happened in China. It has been reported that China imports around 80 per cent of its annual copper consumption – 10.9 million tonnes of 13.5 million tonnes. Those imports represent more than one third of the global copper market. As per the mining sector report, Chile’s copper mining industry, the world’s largest, saw a 17 per cent drop in its production costs in the first half of 2020, the mining ministry reported even as the coronavirus outbreak was sweeping through the South American country. Chile´s sprawling copper deposits remained open through the peak of the outbreak, albeit with reduced staff and beefed up sanitary measures, and they largely maintained output even at the peak of the epidemic. The on-going strike at the Candelaria copper mine entered its fourth week, as 96% of the Mine Workers Union did not accept the latest wage offer made by the management after voting on Tuesday. Meanwhile, the Chilean state-owned producer, in spite of the above case the disruptions to mining operations in Chile, the world’s largest copper producer, have been minimal so far. However, companies including state-owned Codelco and BHP have had to delay projects and pulled back on production owing to lower off take.

Apart from the geopolitical implications, the outcome of the elections could bring along new policies, which would be vital for shaping global demand and supply at a time when the markets are reeling from the impact of the second wave of the COVID-19 pandemic. However, there is an interesting twist to the tale as the base metals market seems to be inclined more towards Biden, while oil seems to be comfortable sticking with Trump. But, a Biden victory is likely to bring a much softer dialogue with China and would also pave the way towards more spending on infrastructure and accelerate the shift from fossil fuels to renewable energy. Over the past years, copper has been one of the tightest commodities in terms of demand vs. supply, delicately balanced with a forecast deficit and surplus in the range of 50,000-200,000 tonnes annually. That is because few copper projects have been brought on line or been given incentive to do so. With this balance, there is not much margin of error, especially if China decides to ramp up its purchases in any given year. This year as most economies locked down, causing their GDP to go near Zero, China's government -- eager to get its GDP back to target -- announced several infrastructure projects to speed up the recovery. It is the fastest way really to show better economic numbers. Even though it had decided to move away from an infrastructure-led economy to a consumer driven one, this year has been an exception. One of copper's demand stories has been electric vehicles and batteries, as the world moves toward a cleaner, more sustainable world.

The recovery rally in late March 2020 was mainly on the rebound in Chinese demand and reports of mine closures in Chile, the top producer, due to rising coronavirus cases. The industry-supporting measures taken by the US, Japan, the European Union and others also acted as a catalyst for copper. Policy easing and fiscal stimulus actions taken by global central banks boosted industrial activities and thus the demand for copper. China’s central bank initiated an $80-billion monetary easing measures and pledged $559 billion worth of cost cuts to boost economic activities. The reopening of factories and revival in demand from the world’s top metal consumer China helped the recovery. After marking a negative growth in Chinese industrial production in the first quarter, sentiments improved in later days. Official manufacturing data from the country continued to expand for the sixth straight month in August, signalling recuperating industrial activities. Even though COVID-19 led to a severe demand crisis for copper, there was a visible supply crunch in the form of mine and smelter closures due to lockdowns.

Overall sentiments in the copper market continue to favour the bulls as the global supply of refined copper remains short in 2020. Though mining resumed in major hubs, copper has only narrowed the deficit from 96,000 tonnes in April to 60,000 tonnes in May 2020. Looking ahead, traders may largely focus on demand-supply dynamics and global economic outlook, which will directly influence prices.