Global copper market saw a mild recovery amidst renewed aggression by
the Chinese participants, though the global sentiments continues plummet as
nations gear up to fight COVID-19 with increased focus. In the face of the
continued pandemic, and resulting country lockdowns, copper has been hit by
headwinds and tailwinds at the same time. On one side producers have halted
production, adding some support, yet on the other hand demand has dried up as
the world hunkers down to prevent further spread and save lives. As increasing
number of cases are being reported around the world, major market indices have shrunk
by over than 20 per cent from their highs in last 2 months and have entered in
the bearish territory/region. The fear of economic recession is looming large
on several economies. Since the development of vaccine against COVID-19 looks
as a distant reality (may take a minimum of 8-10 months) I feel that both
supply and demand chain disruptions arising for goods and services are likely
to continue for much longer. The effects of Covid-19 on global businesses are
also becoming visible, with companies scaling down operations, asking employees
to work home, slashing production targets. Sectors such as aviation, tourism,
hospitality have almost come to a grinding halt. Moreover, as the coronavirus
pandemic is seeing an accelerating situation in emerging markets, a third round
of hits to the global economy is shaping up and emerging market economies will
encounter tougher challenges.
Unlike developed countries, which have relatively complete and balanced
economic systems, emerging market economies are not very sound in terms of an
economic ecology and mechanism, and would suffer more damage. Some emerging
markets have already seen economic slowdowns due to long-term economic
structural problems. The pandemic has weighed on the contractions and have even
drawn them into crisis. Wider impacts are likely to be visible in the emerging
markets as the pace of spread of COVID-19 is likely to derail several
economies. The countries may even see economic stagnations amid quarantines and
lockdowns as they have a higher dependency on the global market, especially for
energy and export-oriented economies. The turbulence of financial markets and
the rise of financing cost are likely to further trigger a series of debt
defaults, or even lead to a regional debt crisis. As a result, emerging markets
would be hit harder, lose more, and even generate a chain reaction under the
new phase of the pandemic. Emerging markets and developing countries contributed
47.8 per cent to the global economic growth in 2018, and if the emerging
economies slide into a crisis, the global economy will take a longer period of
time to resume.
The copper markets have improved by about 12 per cent in the last
month, despite a rapidly deteriorating outlook for global economic growth and
industrial metals demand. Copper's recent rally has ploughed on through April,
shrugging off an IMF projection of -3 per cent GDP growth in 2020, and a
collapse in crude oil prices. Offering some support to copper prices in recent
weeks have been mine production cuts as the Covid-19 crisis has deepened in key
production region South America. The global copper market is headed for a
surplus of between 200,000-300,000 tonnes in 2020. Australia-based mining group
MMG's copper production fell by 24 per cent year on year in the first quarter
on disruption to output at its Peruvian mine Las Bambas. Elsewhere, Canadian
miner First Quantum Minerals this week revised down its 2020 production
guidance for its Cobre Panama copper mine, which has been shut down because of
Covid-19. The global copper market is headed for a surplus of between
200,000-300,000 tonnes in 2020. China's refined copper production fell in March
as producers cut output during the outbreak. Domestic output fell to its lowest
level since May 2019 to 771,000 MT in March, down by 2.5 per cent from a year
earlier, according to data this week from China's national bureau of
statistics.
The supply side response so far has been conservative relative to the
expected drop in demand, and nowhere near big enough to preserve a supply
deficit forecast by some at the start of the year, before Covid-19 halted
swathes of the world's copper-consuming manufacturing base, including the
automotive sector. Projections of the drop in global demand for copper this
year vary widely, but forecasts made before the IMF's projection of contracting
GDP included a fall in demand of 5-6 per cent, against a drop in supply of
around 1 per cent. The slackening global copper demand showed the depth of the
downturn in manufacturing since Covid-19 struck. April purchasing managers
index readings for manufacturing in Europe dropped to 20-year lows, with
equivalent US readings at 11-year lows. Automotive sector, which is one of the
largest copper consuming industries, is going through its worst phase. There have
been huge drops in car sales have occurred across Europe - with new car sales
in France in April down by 88.8 per cent on the year, the Italian market falling
by 97.5 per cent from last year and the Italian market falling by 97.3 per
cent.
Economic activity in the euro zone all but ground to a halt this month
as the coronavirus forced governments around the world to impose lockdowns and
firms to down tools and shut their businesses. The spread of the pandemic has
resulted in down scaling of economic activities in all major affected countries
for the past 3 months leading to economic slowdown and financial crises. As per
studies, the worst has not yet been seen in the data, prices of copper are
expected to come down further in the short term. Many countries have now
resorted to judicious easing of restrictions. Major countries resorting to
phase wise controlled easing of restrictions are US, Italy, Spain, Portugal,
Belgium and India as the longer the industries / economic activities are
closed, the more would be the economic pain. Central banks pouring money over
these markets and strong industrial demand in China seem to still underpin
prices at these levels.
Saving lives has become a priority for all the countries in the world
and the slowing down or decelerating economic growth has taken a back seat.
But, the negative growth in the national income of several countries has forced
controlled opening up of the economic activities to generate resources to fight
the battle against COVID-19 pandemic. China is an important country for copper
prices because it is the largest buyer. Still, there are signs that the demand
for copper and copper-made products will decline since most of China’s trading
partners are now struggling. Moreover, the IMF warned that the world would go
through the worst recession since the Great Depression. This is a negative for
copper prices, which tend to do well when the economy is booming.
The short-term outlook is one where these rallies run out of steam
because we are still faced with the biggest demand shock in living memory it
will take a long time to reset itself. Overall, the long term demand continues
be robust. The increased demand for the uninterruptable and well-founded supply
of electricity along with rising concern to reduce energy transmission and
distribution lines would certainly lead to increased demand of copper. The
positive signs surrounding pandemic is the restart of economic activity in
China which is likely to kick start the economic churning of the global
economic wheel.
