- Copper price continuously fell in 2019 despite supply disruptions and marginal deficit in the market
- Drivers for copper price in 2019 and performance expectation in 2020?
The red metal (as copper is generally addressed) managed to end the year 2019 in green contrary to its performance during the year. Doctor copper began the year at $6,075/tonne, dipped to as low as $5,757/tonne in October and ended the year at $6,077/tonne – effectively flat year on year growth. Though, when compared to 2018, copper price fell by nearly 8% in 2019, from $6,530/tonne to $6,010/tonne.
This declining trend in 2019 was seen in all base metals except Nickel where fundamentals (strong demand and weak supply together with Indonesia’s nickel ore export ban) played the key role.
In case of Copper, however, price movement defied fundamentals in 2019. The historical trend analysis of copper reveals that price has largely responded to the metal’s demand supply balance in the market. As shown in below charts, since 2014, the copper price movement has been directly correlated to copper demand and supply. Since the market has been in deficit since then, the copper prices surged with increase in deficit and dipped with decrease in deficit. The reduction in copper deficit from 417,000 tonnes in 2014 to 136,000 tonnes in 2016 led to decline in the price by close to 16%. Similarly, increase in deficit from 136,000 in 2016 to 391,000 in 2018 shot up the price by nearly 15%.
In 2019, however, the price movement was not driven by the metal’s demand supply balance, instead, it was the fear of global economic slowdown linked to US-China trade war, that drove the price for most of 2019. For example, the market turned into deficit in Q2 from marginal surplus in Q1, however the price fell by ~2% and continued to fall by another 5% in Q3 while the market remained in deficit. On the contrary, it clearly responded to tariff related interactions between the 2 countries as copper price fell sharply by 7% in May 2019 when the US further hiked tariffs on Chinese exports.
Analysts also echoed this view - "All the weakness you're seeing in copper and oil, and other commodities other than precious metals, reflect market issues, not necessarily fundamentals in those markets," Jeffrey Christian, CPM Group Managing Partner. Paradigm Capital analyst David Davidson also stated the same -"If the trade dispute is not resolved or at least contained in the short term, a recession, or a significant global slowdown, is on the cards, and copper and other risk assets have only one way to go — lower. Fundamentals really don't matter in this uncertain economic environment."
The prolonged trade war between two economic superpowers of the world – US and China, triggered concerns over economic slowdown which in turn dampened the global industrial demand during the year. US industrial production (which includes manufacturing, mining and utilities) declined continuously in 2019 and turned negative in Q4 2019. Similarly, China’s industrial output grew by merely 4.4% in August 2019 – slowest since February 2002. China’s manufacturing sector, which consumes 50% of global copper consumption, has remained slow throughout the year due to weak consumer demand, although, China’s production grew by ~6.5% in Q4 2019 due to stimulus provided by the government. This weakness in global demand during the year, countered the impact of several supply disruptions around the world - weather disruption in Chile, strikes in Peru, Indonesia’s mine transition and lower output in the African Copperbelt and kept the price under pressure for nearly the entire year.
Nevertheless, the upside in the price at the end of 2019 is continuing in 2020 as well – it increased from $6,155/tonne on 31st December 2019 to $6,306/tonne on 17th January 2020. This momentum was triggered by the announcement of “Phase One” trade deal between the countries.
In the latest development (during this “Phase One” of trade deal on 15th January 2020), China agreed to buy $200 billion of US goods and services over the next two years. In return, the United States has agreed to reduce tariffs on $120 billion worth of Chinese products from 15% to 7.5%. This is expected to provide a significant relief to China’s industrial sector and together with government impetus, its industrial sector is expected to show signs of improvement in near future.
Copper being an indicator of global economic health is expected to soar in the near future. In the short term, copper price is expected to rebound as this recent breakthrough deal is anticipated to recover copper demand by industrial sector across the globe. This, together with sustained supply disruptions, will push the price high which could easily breach its 2018 level of $6,500/tonne by the end of 2020.