Copper marks strong price performance in 2020, what is driving the trend?

• Copper LME prices jump 55% from March 2020 lows
• Consumption improves in H1, 2020, with China coming to the rescue
• Lower supply, slow but persistent demand push the commodity into extended deficit

Copper, the reddish-brown metal as been on a run over the past few months with prices at the major LME 3-month forward benchmark riding higher above the US$ 6,500 per MT mark as of the latest quote on 28^th September and even touched US$ 6,800 per MT levels in the earlier part of this month, its best rate since Jun 2018. The metal treated as a gauge for the broader economy as it is consumed from construction to automobile, electricals, appliances and transportation sector amongst others has seen prices rising by over 55% since the March 2020 low, when the price of the metal along with other agricultural, energy, metals and minerals fell sharply as the coronavirus pandemic hit the wider global economy. Fall in prices across the board was driven by lockdown announcements from major global economies, hitting consumption for major industries while affecting global economic growth, employment, consumption along with trading and investment sentiment across asset classes.

While most commodities and other asset classes have registered decent recovery from the March lows as sentiment and demand improves gradually, very few have been able to record the rally as seen in copper prices globally. If we look into the actual demand-supply data for the commodity from ICSG (International Copper Study Group), production for the metal was lower during the first half of the year, both for mined and refined metal. Preliminary data show, global copper mined output declined by 1% in H1 2020 to 9.84 million MT, with the largest drop witnessed in Apr-May months, the period which was hardest hit by lockdowns globally and led to partial or complete mine shutdowns. Amongst the major ones, the biggest decline in production was seen in Peru, wherein the pandemic along with bad weather led to major mining activity getting hit and output dropping by nearly 20% during the first half of the year. Activity was also affected in Australia along with Canada, Mexico, and the US in the Americas amongst other; although support came from production increase from the world’s largest producer, Chile which recorded production increasing by 2.6% during the first 6 months while growth was also seen in Democratic Republic of Congo (DRC) and Indonesia. This aided copper mined output in the period against a bigger fall. Global mined capacity utilization was lowest in years wherein utilization slipped below 80% levels during the first half as compared to ~85%+ levels in the last two years. Positively, utilization was lower near 80.4% in first half of 2019, while the full year recorded strong utilization in the range of 85%, indicating strong pullback in production in second half. It is likely that, the second half of 2020 also registers better numbers as compared to the initial half of the year, though concerns remain as a number of countries and miners report sluggishness in mining activity as against the initial anticipated improvement post the Covid-19 fallout.

Source: ICSG, Televisory Research

Against the marginal fall in mined output, refined production during the first half rose by 1% aided by primary production (electrolytic and electrowinning) increasing by 2.3% to 9.97 million MT while growth in secondary production (backed by availability of scrap copper) declined by 5.2% to 1.93 million MT. Net to net, total refined output just managed 1% growth to 11.90 million MT. Biggest growth in refined production was led by Chile, with production scaling higher by 15% as compared to the 1^st half of 2019. Refined production was higher in Democratic Republic of Congo and Japan amongst others though dipped in India, Zambia, the US and most importantly China which continues to the biggest producer and consumer of the metal in the world. Chinese production was inflicted by restriction in the movement of man and material amidst the pandemic along with lower availability of copper concentrates due to imports issues amidst the lockdown at many other places around the world.

So on one side, mined supply as well as refined production was hit globally moderately due to the direct and indirect affects of the pandemic; consumption data saw a surprise and was nearly unchanged in the first half of the year as compared to last years data, standing near 12.13 million MT, a tad higher by 0.3% on a YoY comparison. Strong resurgence of demand from China, which was the first to be hit by Coronavirus and also one of first ones to manage and reduce the negative effects of the pandemic, aided the recovery for metal consumption while likewise production nearly moved to standstill in the two critical months of Apr-May in most economies around the world. This can be ascertained from the fact that Copper refined demand around the world Ex-China slipped by around 9% during the period under review. Amongst the other bigger consuming hubs for copper commodity, demand fell in Japan (12%) the EU (10%), the US (4.5%) and Asia (Ex-China by 8%). Nevertheless, lower availability of scrap copper and shortage of concentrate pushed over 30% increase in refined copper imports from China whereas Chinese apparent usage grew 9%, neutralizing the drop in consumption from other major world economies. However, internal data suggests actual Chinese consumption of the metal was lower than the total Chinese demand as also can be seen through the increase in Chinese coper stocks at the SHFE. The same can also be seen through the weaker growth in IIP, PMI and PPI amongst others in the initial months of the year. Positively, things have improved lately and expected to drive physical consumption further higher in the second half of the year for the commodity in China.

Stable overall global demand and modest cut in output pushed the commodity into yet another deficit situation in H1, 2020. As per ICSG, deficit for copper stood near 235,000 MT during the period, wherein for the full year as well, data suggest for another year of deficit for the commodity. While production, particularly refined output is expected to ameliorate in the coming months and quarters, demand for the metal is seen increasing at an even higher pace as gradual recovery in industrial, construction and transportation side takes place in other major emerging and developed economies around the world. This is also expected to drive the positivity in price of the metal even higher in the period, though volatility is anticipated to increase after the near one-way rally.

Initially, the rise in price of copper was majorly driven by Chinese demand along with sharp pullback after the huge sentimentally driven crash in the commodity alongside other commodities and asset classes. In the latter months, pent-up demand for the metal from major consuming sectors alongside huge financial and fiscal stimulus measures taken up by major economies around the world drove prices for the reddish-brown metal. Added support comes in the form of lower inventories in major exchanges, mainly LME, the world’s largest trading hub for base metals which has seen copper inventories drop down to multi year lows over the last few months and indicate tightness in metal availability. While part of the inventory has moved to SHFE which has simultaneously seen stocks rise during the last few months, broader drop in global inventories (including in the bonded warehouse in China) depicts enhanced consumption for the metal further pushing the outlook of the commodity higher. We feel, prices may remain volatile after the strong surge in the first half though overall bullishness is expected to continue, mainly driven by supply side squeeze (mined/concentrate output troubles) and supported by modest but persistent melioration in consumption.