Copper Moves on After Confronting Covid-19 & Looming Economic Recession

Posted on 26th June 2020 by Hanish Kumar Sinha, Head - Research & Development, NBHC

The global copper market is going through an unusual period in history as the coronavirus pandemic has unleashed a series of unprecedented events affecting every industry. As part of the new emerging geographic scenario, the United States is forecast to readjust to a 0.9 per cent CAGR. Within Europe, the region worst hit by the pandemic, Germany is likely to add over 53.7 thousand MT to the region’s size over the next 7 to 8 years. In addition, over 65.1 thousand MT worth of projected demand in the region is expected to come from Rest of European markets. In Japan, the Electrical & Electronics segment is likely to reach a market size of 549.7 thousand MT by the close of the analysis period. Blamed for the pandemic, significant political and economic challenges confront China. Amid the growing push for decoupling and economic distancing, the changing relationship between China and the rest of the world is expected to influence competition and opportunities in the global Copper market.Against this backdrop and the changing geopolitical, business and consumer sentiments, the world’s second largest economy will grow at 3.9 per cent over the next couple of years and add approximately 1.2 Million MT in terms of addressable market opportunity. Continuous monitoring for emerging signs of a possible new world order post-COVID-19 crisis is a must for aspiring businesses and their astute leaders seeking to find success in the now changing copper market landscape.

Apart from the Electrical & Electronics segment, the construction and manufacturing sector is also showing signs of recovery. Economic data is signalling a robust recovery in the Chinese construction and manufacturing sectors during the second quarter. Demand for copper in China, where half the world’s output is consumed, has picked up significantly since Beijing eased its lockdown in March. As its economy has clicked back into gear, physical premiums - the extra price buyers pay to take delivery of the metal immediately - have risen sharply while inventories have plunged as manufacturers scrambled for supply. The closely tracked utilisation rates at wire rod mills - which account for two-thirds of China’s refined copper consumption - have rebounded, hitting 90 per cent in April.Thus, we can clearly see signs of economic recoveries in different parts of the world, though the pace of recovery is too varied in different economic locales.

The decision to keep Chinese factories shut after the Lunar New Year sent shudders through the massive mines of Brazil and Chile that feed them. So far, mining heavy weights like Vale and Codelco have managed to continue operating through the outbreak, adopting safety measures without stalling output. Other mines in the region that did shut are now reopening.Now, with China getting back to work and Latin America the new virus hot spot, concern is shifting from demand to supply. Alarm bells are starting to ring again in metal markets as the outbreak explodes in Latin America, with the region’s highly urbanized population of 600 million accounting for about 40 per cent of daily deaths globally. That’s coming at a time when Chinese demand is recovering and markets tighten. Chile is the top exporter of copper and Brazil is the second-largest shipper of iron ore.So far, mining heavyweights like Vale and Codelco have managed to continue operating through the outbreak, adopting safety measures without stalling output. Other mines in the region that did shut are now reopening.

The positive in the market is stiff recovering of the Chinese economy. The focus is on recovering activity in China rather than downturn in the rest of the world. Beijing’s stimulus package, centred on "new” infrastructure such as electric vehicle charging points, should be positive for copper demand. China’s continued strong imports and relatively flat global exchange stocks reinforce the positive optics. Unsurprisingly, given the level of lockdown disruption in key producer countries such as Peru, global mine supply is expected to fall by 4 per cent this year. That will translate into a 2.4 per cent drop in production of refined metal. A surplus of copper isn’t obvious right now. Global exchange stocks currently total 461500 MT, which is only 549000 MT higher than this time last year. Rises in LME and CME inventories have been almost totally offset by declines on the Shanghai Futures Exchange, where registered stocks have fallen by 219000 MT over in April and May. Post lockdown, China’s consumption of refined copper improved by about 4 per cent at 1.19 million MT in the first four months of the year, although higher import flows may be partly down to a near collapse in scrap supplies. Imports of copper scrap totalled just 292,400 tonnes in January-April, down 43 per cent on last year.

One should always remember that China consumes over 45 per cent of the global copper. The current concern is the slowing demand signs in the Chinese market. Although Beijing’s latest stimulus package ticks a lot of copper boxes, there is absence of liquidity flood and construction boom such as seen a decade ago. Then there is the problem of what China is going to do with all the copper-containing products, such as air-conditioners and white goods, it normally exports. The coronavirus’ second-round hit on demand, in the form of Western consumer appetite, looks set to be bigger than the direct impact of lockdowns. China’s factories suffered a collapse in export orders in April, according to both official and Caixin Purchasing Manager’s Indices. Weak exports are the point of maximum weakness for China’s copper sector, although it could take several months before a build in product inventories works its way back up the value chain to the refined metal segment. Moreover, the fear of resurgence of US - China trade war, which seems to be a reality, given the aggressive postures taken by China on several geo-political fronts.

During the current pandemic era, copper demand from the top consumer China has fallen by 2.8 percent to 11.87 million MT this year but is expected to rise by 2.6 percent in 2021. Demand from other key consumers like Europe, North America including US, Canada and Mexico is also expected to deteriorate this year. Going forward, a swift turnaround in demand is least expected. Global industrial activities remain on the lower side due to the negative impact of the pandemic. The copper market is expected to find more support Global reported refined copper demand in 2019 was 23.915 million MT, up 25 thousand MT on that for 2018. For 2020 the forecasts suggest that refined copper demand might be 22.625 million MT, a decrease of 5.4 per cent. For 2021, demand for refined copper might increase by 4.4 per cent to 23.625 million MT. Looming tensions between US and China is likely to worsen their trade relations further that may on weigh demand from the world’s largest Copper consumer China. In spite of the pick-up in Chinese industrial activity and mine disruptions, it is still expected that copper supply would outpace demand for this year - the most significant annual market surplus since the global financial crisis since 2007-08. Beijing’s stimulus package, centred on "new” infrastructure such as electric vehicle charging points, should be positive for copper demand. Chinese government stimulus and backlog orders accumulated during the coronavirus-fuelled lockdowns have supported copper demand in top consumer China, while stimulus measures and reopening of economies in the West have also boosted investor sentiment.China’s continued strong imports and relatively flat global exchange stocks reinforce the positive optics.

Dr. Hanish Kumar Sinha
Deputy Vice President - Research & Development
National Bulk Handling Corporation Pvt. Ltd.

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