Improved Demand & Sullen Supplies Propels Copper Recovery

The market is learning to live with Covid 19 and amidst significant dent in the supply owing to Covid cases in major mining areas of Chile; the copper market has made significant recovery in the last 15 to 20 days. The South American nation had recorded 298,557 cases of the virus as of July 7, with the state-owned copper mining company, Codelco, confirming that 2433 of its staff had contracted the virus. Work at all of Codelco’s Northern District projects including Gaby, Ministro Hales and Radomiro and Tomic have now been temporarily suspended. BHP Group has ramped down activity at its Cerro Colorado copper mine in Chile. The mine produced 71,700 tonnes of copper in 2019, accounting for about 1.2 per cent of Chile’s total production. Apart from the supply of the raw copper, the extensive lockdown measures across the world had stalled the scrap generation machine, and trade data available for the top scrap exporting nations indicated a more than 50 per cent year-on-year contraction in supply. The death toll from the virus in Peru, the world’s no. 2 copper producer, now stands at 10,589, the 10^th highest in the world, based on data from Johns Hopkins University. For confirmed cases, the Andean country has the fifth-highest in the world. Looking further ahead, the supply impact of the coronavirus is expected to extend far beyond this year, as 2020 has already seen capital expenditure guidance cuts from copper miners and the mine project pipeline is shrinking owing to lockdown-related delays.

The demand improvement is also adding up the positivity of the copper market as the unprecedented levels of stimulus across the world are set to sustain the recovery in copper demand in the longer term. The extensive lockdown measures across the world had stalled the scrap generation machine, and trade data available for the top scrap exporting nations indicated a more than 50 per cent year-on-year contraction in April shipments. The unprecedented levels of stimulus across the world were set to sustain this recovery in the longer term, especially from the copper-hungry green energy and digital economy sectors, which had been singled out for investment by many governments. Renewable power generation is also copper-hungry and on the rise as countries seek to meet net zero commitments. China is the single most important source of demand for industrial metals. It buys between 40 per cent and 50 per cent of the world’s raw aluminium, copper and steel while using nearly two-thirds of the world’s iron ore. These figures, however, exaggerate somewhat China’s role in these markets. While China buys a large share of raw materials, about one-third to half of its purchases was re-exported as components in intermediate or finished goods. The top metals consumer China has carried out an environmental campaign against foreign garbage in recent years, progressively restricting scrap inflows and planning a ban on all solid waste imports by the end of 2020. But, for some undefined reasons, China is dragging its feet in releasing new codes governing high-grade copper and aluminium scrap imports, leaving scrap metal firms abroad confused and without a clear way into their key market.

A slump in global manufacturing showed signs of easing in June as a rebound in Chinese and U.S. activity offered some hope the world’s two largest economies may have passed the worst of the devastation caused by the novel coronavirus, while the collapse in European factory activity abated. The bulls have been firmly in control of copper trade in recent weeks, with the price graph showing a very solid V-shaped recovery, but at the same time as global economies are not showing such optimism. A lot of the bullishness comes from a variety of global fiscal packages aimed at shoring up countries hammered by the coronavirus pandemic. The very strong US non-farm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus. Demand in the US and Europe should recover as lockdowns are hopefully lifted, and Chinese demand should continue to improve due to stimulus measures. In the long-term on the demand side, we are looking at higher-intensity copper usage, higher copper loading in vehicles with the advent of electric vehicles and potentially higher infrastructure spending as well, so that is something we see on the demand side that might be about three to five years out. Investors are increasingly optimistic about an economic rebound, with the mood bolstered after China brought the new coronavirus outbreak under control. The market gloom over the metals that will power the cars of the future is starting to lift. Supply overhangs and then the coronavirus pandemic had crushed short-term prospects for the minerals used to make rechargeable batteries.

Across the world, it is expressed that Government incentives have eased some of the sting from the pandemic which hit the global demand significantly. Despite the oil-price slump that rocked the nascent EV industry, China's government is doubling down on its push into electric vehicles with a range of support measures. Germany's 130 billion euro ($146 billion) recovery budget allocates about 41 billion euros to areas like public transport, electric vehicles and renewable energy. France announced its own 8 billion-euro stimulus package for the auto industry, focusing heavily on the domestic EV supply chain. The outlook for battery demand was not as bad as some were expecting at the height of the global outbreak. Strong signals are there that stimulus efforts will be focused on the shift toward clean energy and electrification in many parts of the world, which is strengthening the medium-long term outlook for demand.

Since, supply is usually easier to track than demand as we can see global miners' projects in the pipeline and the probability of them coming to fruition. Demand is the much harder side of the equation to monitor. It is very sensitive to world GDP, especially Chinese demand. Hence, it got hit extremely hard when China shut down. As China is opening back up with its manufacturing rebounding, copper is facing supply side constraints in Chile, the world's largest producing nation, due to coronavirus concerns and mine closures on back of quarantining. Codelco's curtailment of some smelting operations last week after fatalities among its workforce shows just how at risk the supply side is. China is desperate to boost its GDP growth, or in this case defend it, and the fastest way to produce good economic data is to boost infrastructure spending. It goes against China's long-term deleveraging of industrial investment in favour of consumer investment, but right now it just needs to provide a floor to the data. In addition, China is very strategic. There has been speculation the State Reserve Bureau has been using this price weakness to top off its strategic inventories of the metal, which is quite possible as China has a buy-low, sell-high mentality. The same was seen in oil. Chinese officials are extremely shrewd in purchasing their raw materials and are very opportunistic and tactical.

Finally, we know that the only reason the market and asset prices are up is due to the unprecedented liquidity injections by central banks. It is like trying to jump-start a car that has been dying for the past year but the owner does not want to scrap it. It is throwing everything at the car just to keep it moving and buying time that the car can move on its own without the push. The next few weeks are critical as the second wave of the virus is showing up and a number of countries are delaying their re-openings.