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Copper Moving Strength to Strength despite Weakness in Global Economies

Posted on 8th September 2020 by Dr. Hanish Kumar Sinha, Head - Research & Development, NBHC

Increased uncertainty in the global market, the low level of demand creation and abrupt disruptions in the service sector owing to wide spread COVID 19 together could not dampen the overall underlying strength in the copper market - the barometer of global economic health. In the last six months, the copper prices have improved by over 35 per cent. The factors attributing to the rise in the prices is the large scale supply disruption in the major mines in Latin America and positive improvement demand owing to increased demand of Electrical vehicles and renewed preference for non-conventional energy sources. As the global market is learning live with the post COVID 19 developments, the demand for the copper is likely to further support the bullish sentiments as it would take some time for the supplies to catch up to the demand. Globally, construction and transportation sectors are major demand drivers for copper and these sectors are strongly correlated with the health of the underlying economies. The declining inventory at major centres in Europe and South East Asian Countries is also adding to the support of copper prices. The commencement of the neo-normal demand supply scenario, traditional demand is likely to emerge where the twin levers of industrialisation and urbanisation are still developing today. Investment that seeks to adapt to, insure against and mitigate the impacts of climate change may eventually rise to become a material element of demand. Further, the electrification of transport and the decarbonisation of stationary power are expected to progress rapidly, as will the desire to tackle harder-to-abate emissions elsewhere in the energy, industrial and land-use systems. Comprehensive stewardship of the biosphere and ethical end-to-end supply chains will become even more important for earning and retaining community and investor trust.

The supply normalization has always been a challenge since the post COVID 19 gradual opening up of the several global economies. Mine supply disruptions and stronger-than-expected economic recovery in China have supported prices. Depleted inventories and supply challenges are keeping the fundamental backdrop supportive. Preliminary data indicates that world refined copper production increased by 0.5 per cent during the first five months of 2020 with primary production (electrolytic and electro-winning) up by 2 per cent and secondary production (from scrap) down by 6 per cent. Chilean electrolytic refined output increased by 46 per cent as in the comparative period of 2019 production was negatively affected by temporary smelter shutdowns whilst undergoing upgrades to comply with new environmental regulations. Total Chilean refined copper production (including Electro-winning) increased by 12 per cent. Chinese refined production growth was negatively impacted by temporary shutdowns related to COVID-19 restrictions, tight scrap supply and constraints associated with concentrate imports and oversupply in the sulphuric acid market. In Africa, refined production in the DRC was up 4.5 per cent but production in Zambia fell by 17 per cent due to operational issues and temporary shutdowns. Indian refined output decreased by 28 per cent primarily as a consequence of the suspension of Birla Copper’s operations at the end of March following a national lockdown due to COVID-19. Japanese refined production rose by 4 per cent mainly due to the fact that they were a number of maintenance shutdowns during the same period of 2019. Globally, constrained scrap supply due to the COVID-19 lockdown and lower copper prices have negatively impacted secondary refined production. Thus we can witness that the mine production decline was made from the increased supply of the refined copper.

Multiple positive events developed in the pre, in and post COVID 19 period which actually supported copper prices in a big way. Some of the developments worth mentioning are The Stage One trade deal between the US and China, which concluded just days before China announced its own outbreak, the massive application of policy stimulus and liquidity support that followed, which enabled pro-growth assets to stabilise, and then recover, the broad realisation that China was experiencing a V-shaped recovery and last but not the least was of the South America becoming the epicentre of the global COVID-19 outbreak, with associated risks to Peruvian and Chilean copper supply, which provided a copper-specific spur for prices over and above general macro sentiment.The availability of copper scrap was constrained globally with China implementing the new solid waste law, starting 1st September, 2020 which has adequately dampened copper scrap importers interests, causing worries about future copper scrap supply and thus applying more pressure on the fresh copper cathode demand where the boom is expected in the coming months.

Currently, China is leading the way in the recovery of copper which was reflected in a 50 per cent month-on-month increase in unwrought copper imports by China in June to a record high of 656,483 tonnes, just over double the level imported in the same month of 2019. For the first six months of 2020, copper imports totalled 2.84 million, a 25 percent increase on the same period of 2019, despite the disruption caused by COVID-19.China’s switch to renewable energy systems is likely to be a key demand driver going forward. Copper is the best non-precious metal conductor of electricity due to the lack of resistance it offers. This property makes it an important component in energy-efficient generators and renewable energy systems, with solar and wind energy installations using larger volumes of copper than conventional thermal power generators.Electric vehicle production is also expected to drive China’s copper consumption as china is planning to become the leading country in the world by 2025. Copper is an important component in electric vehicles, used in the batteries, windings, and copper rotors of electric motors, as well as in the wiring and charging infrastructure. At an average of 83kg of copper, the typical electric vehicle uses nearly four times as much of the metal as a conventional car.

On the macroeconomic level, the developed world and China have fared somewhat better in combating the first wave of the outbreak, albeit with large national variation. The presence of mature existing health infrastructure allied to the ability to quickly mobilise productive and financial resources to both fight the virus and ameliorate the economic impacts of lockdown have put the developed world in a privileged relative position. At the same time, capital has flowed out of the emerging world, adding balance of payments and debt stress to the already crushing burden of COVID-19. As a result, we expect that 2020 is likely to see the first collective contraction in the economies of the developing world for more than 60 years. In spite of the positive stimulus being infused in several global economies including India, what is still highly uncertain is whether traditional monetary and fiscal stimulus policies will have below-average or above-average multiplier effects. A lower multiplier could result from depressed consumer and business confidence due to the deleterious impact of COVID-19 on both jobs and profitability. A higher multiplier could occur if the lagged impact of stimulus coincides with the release of pent-up demand as economies wake from hibernation.The Impact of COVID 19 on India has been wide spread and the its informal economy, which provides four out of five non-farm jobs, has arguably been in direr straits, particularly in urban areas. Returning India to a healthy medium-term growth trajectory will require a reduction in policy uncertainty, an increase in social stability, a greater focus on unlocking the country's rich human potential, and an increase in international competitiveness in both manufacturing and traded services.

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