Can copper’s price rally last?

First published in the May 2021 issue of Metal Market Magazine

While the copper market is in recovery mode, with confidence that the Covid-19 pandemic is starting to ebb, supporting both prices and underlying demand, the rate of growth through recovery is expected to wane somewhat in coming months. Some market observers say that starting sometime in the second half of this year there could be a price correction.

“Even though industrial production in many regions of the world is still below pre-pandemic levels, the quickest part of this recovery is probably behind us,” Sergey Donskoy, a metals and mining analyst with Société Générale, said.

Recently, however, there has been some increased momentum. “Copper has rebounded well since the start of April after consolidation in March,” Fastmarkets MB analysts reported in their April 20 Base Metals Market Tracker. They predict “given the positive momentum, tight fundamentals, investors’ focus on the Green Transition and the reinflationary environment induced by the dovish [US Federal Reserve], copper prices could touch $10,000 per tonne in the immediate term.”

That is precisely what happened on April 29, when the LME copper price topped $10,000 per tonne to reach its highest level since 2011, before easing back to $9,885 per tonne later that day and inching up again to $9,900 per tonne on April 30.

Geordie Wilkes, director of research for Sucden Financial, pointed out that while year-to-date LME copper prices have already come up from a low of about $4,600 per tonne in March 2020, they could push even higher – perhaps even as high as $11,000 per tonne – especially if investor sentiment remains more confident. “There could, however, be a softening in Chinese GDP in the fourth quarter,” he said. “That could result in some headwinds for copper prices.”

Volatility prevails
The copper market of late has been a little choppy with a lot of price volatility, John Mothersole, director of IHS Markit’s pricing and purchasing service, said. Terming it as a spike and retreat scenario, he observed that after gradually rising to just over $9,600 per tonne this February, LME copper prices fell back to about $8,800 per tonne at the beginning of April before the recent surge.

He said that he does not believe this volatility is over. “We believe that copper prices will likely fall below $8,500 per tonne by the end of this year that they will continue to decline, possibly to $7,600 to $7,700 per tonne by 2023 or 2024 before picking up again. A major reason for the recent strength in pricing has been a revival in demand,” Mothersole said.

Analysts at JP Morgan stated in their latest base metals quarterly report that one of the main sources of impetus behind copper’s decade-high price appears to be investors’ expectations that government pledges to reach net-zero emissions of greenhouse gases by the middle of this century will demand huge quantities of metals, including copper.

“But while the transition to green technology presents meaningful and expanding opportunities for base metals demand growth in the coming decade, we still think demand volumes will not reach a critical inflection point until the second half of the decade,” they wrote, predicting that, overall, green transition applications of copper will rise from 1.4 million tonnes in 2020 to 2.6 million tonnes in 2025, and 4.5 million tonnes in 2030. That, they said, will equate to about 10% of total copper demand by 2025, up from 6% currently.

Mothersole said that the demand story has been and continues to be a tale of two markets – China and everywhere else. That was the case last year when, according to the International Copper Study Group (ICSG), overall copper consumption was down about 3%, while Chinese copper consumption grew by 14.5%. Mothersole said that at the same time it contracted more than 8% elsewhere in the world (including a 7.5% decline in Europe and a 5.2% decline in the US).

China’s dominance
With China accounting for over 50% of the global market, that is where the long-term gains in copper demand will be made, Wilkes highlighted.

Donskoy said that while there is expected to be double-digit percentage copper demand growth in China this year, perhaps it will not be at the current 20-25% year-on-year rate seen in the first quarter, since that is compared with when China was still in the severe throes of the pandemic last year. Also, there has been some accumulation in semi-finished product inventories.

Fastmarkets observed that Chinese refined copper demand started off strong this year. According to official data, for the first two months of the year Chinese air conditioner output grew by 71%, washing machine output increased by 68%, auto production was up 90%, power grid investments rose by 65%, semiconductor output increased by 80% and property sales surged by 105% compared with the like period a year earlier.

It is, however, possible that the peak in the Chinese refined copper demand growth rate has already been reached. In contrast with expectations, since China’s Lunar new year holidays, Fastmarkets maintained that there has not been any acceleration in physical demand and that, at the same time, premiums in Shanghai have moved lower, the SHFE/LME arbitrage has been closed, visible inventories have increased at a notable pace, and traders view the current state of the Chinese physical market as “extremely weak.”

Fastmarkets analysts also said that there could be a shift in consumer behavior from goods to services and authorities could normalize monetary policy, which, in turn, could have negative implications for China’s property and infrastructure sectors, and thus refined copper consumption.

On the other hand, Mothersole pointed out that China has had some targeted stimulus aimed at high-speed rail and general infrastructure, which should be supportive of copper use, as is its push to incentivize the country’s electric vehicle (EV) market.

According to Wilkes, the average internal combustion engine vehicle contains about 23kg of copper while a comparable EV model contains about 84kg. But Donskoy said that while EVs could eventually be a big driver of copper demand, it will not likely be so until the back end of the decade, once they gain more market share.

“That is why I don’t subscribe to the so-called ‘super cycle’ narrative,” Mothersole said. “While the energy transition, including the growth of EVs and their associated infrastructure, might add as much as 1 million tonnes of copper consumption by 2025, which isn’t insignificant, I don’t believe it will be a gamechanger.”

One headwind to Chinese copper demand is that there has been some reshoring of manufacturing from China back to its previous locations, Wilkes pointed out. Also, both the Chinese and global automotive market is being impeded by the shortage of semiconductor chips. “There isn’t any short-term fix,” Wilkes said. “So, it is likely to continue through the medium term.”

He also observed that, recently, China’s construction sector activity started to fall off slightly. Wilkes observed that China’s non-manufacturing purchasing managers index (PMI), while down somewhat from its highs, remains expansionary.

Scrap policy changes
Meanwhile, it remains uncertain what the dynamics will be between Chinese demand for copper and copper scrap. Carlos Risopatron, ICSG’s director of economics and environment, noted that last year there was very little trade in copper scrap, partly because of the pandemic but also due to the very stringent scrap import restrictions imposed by the Chinese government, which resulted in Chinese scrap demand going from 7 million tonnes in 2017 to only 4 million tonnes last year. He said that, as result of China just accepting very pure grades, last year European copper scrap exports fell by 73% and US exports fell 18%.

Donskoy said that this year’s easing of Chinese scrap import regulations has not yet had much of an impact upon refined copper demand. He said that while Chinese copper scrap imports were up in the year to date through March, that increase was not enough to make a material difference. Wilkes agreed, stating, “It is still too early to tell how much of an impact it will eventually have, but it is something we will have to continue to watch.”

Refined copper consumption outside of China, while seeing a nice recovery over the past three quarters that could continue in coming months, will not necessarily return to pre-pandemic levels this year, according to Mothersole. Copper demand in Europe is softer than that in either China or the US, Wilkes said, especially given its new wave of pandemic-related lockdowns, although recently Europe’s construction sector is starting to pick up. Europe’s March construction PMI was positive for the first time since February 2020.

Weakness in the auto sector, however, has particularly affected Germany’s economy. Wilkes added that Europe tends to take a while to turn around given the fragmented nature of the EU bloc.

Meanwhile, he said that there have been positive signs of recovery in the US, with its manufacturing sector in particular becoming more buoyant. In fact, the Institute for Supply Management’s US manufacturing PMI jumped to 64.7% in March – its highest level since December 1983.

Also, Wilkes said that even though month-on-month construction spending has been trending slightly down, it remains high on a historical basis. “Also, the proposed infrastructure spending bill should be positive for copper demand,” he said, especially given US President Joe Biden’s green agenda.

Weak supply level
Meanwhile, Mothersole terms global copper supply as being “terrible” with mine production contracting last year for the second year in a row, which he said is unprecedented. But he did note that the contraction was only about 0.1% last year, which was less than had been expected earlier in the year.

Risopatron noted that the amount of concentrate smelted and refined were also fairly stable, falling to 16.6 million tonnes in 2020 from 16.7 million tonnes in 2019.

The current record-low treatment and refining changes (TC/RCs), which, according to Mothersole, have fallen to more than a 10-year low, could lead to more smelter maintenance outages, slower shipments and a tighter copper concentrate market. Wilkes noted the recent delay in shipments from Chile and Peru (which together account for about 35% of global mine production) due to weather- and Covid-related mine suspensions.

There were also other factors that contributed to the mine disruptions, Mothersole pointed out, including Peru’s short-term trucking strike and political uncertainties. According to a recent Société Générale analyst note, strikes at two main Chilean copper exporting ports – Antofagasta and Iquique – has triggered concerns that future supply disruptions could be possible, potentially affecting companies’ ability to meet green infrastructure-related copper demand.

Wilkes said he is expecting to see more of a response from miners, especially as inventories are drawn down. “While there hasn’t been much new mining capacity coming online, miners might start to be incentivized to slowly increase their output,” he said.

Donskoy highlighted a small cluster of mine projects, including Freeport-McMoRan’s Grasberg Mine and First Quantum’s Cobre Panama Mine. Freeport-McMoRan also recently stated it expects its Cerro Verde Mine – Peru’s largest copper mine and the world’s fourth largest copper mine – to be back to pre-pandemic production levels (about 400,000 tonnes of ore per day) in 2022.

Bold Baatar, Rio Tinto’s chief executive officer – copper, said during CRU’s Cesco Week 2021 virtual copper conference that the expansion of the Oyu Tolgoi Mongolian copper-gold mine owned by Rio Tinto and Turquoise Hill Resources is “on the right track” with Covid-19 restrictions only resulting in about a three-month delay from its original expectations.

He said that once the addition of the underground block cave is completed and fully ramped up by 2030, Oyu Tolgoi is expected to be the world’s fourth largest copper mine, producing an average of 480,000 tonnes per year of copper from 2028 to 2036. Baatar said the target for beginning sustainable production there is October 2022.

Given that there are currently so few mine projects in process, Donskoy said that any delays to those projects could have a very significant impact upon the overall picture. He added that while mine capacity growth should accelerate in 2022 and 2023, this year mine output should increase by only about 500,000-700,000 tonnes.

At the same time, Risopatron observed that the reported refined copper inventories at the various commodity exchanges appear to be coming down.

“The current inventory situation is supportive of high prices,” Donskoy said, noting that while there has been some accumulation of such semi-finished products as wire and tubing, those inventories have not increased very quickly of late and, therefore, are not a big concern, he said.

Fastmarkets is forecasting that reported inventories are likely to fall to 687,000 tonnes this year from 1.5 million tonnes in 2020. But even though they had been hovering at this low level since late last year, Mothersole said that over the past month or so they showed signs of starting to inch back up, in part because of the recent slowing in Chinese manufacturing growth, which Donskoy said could also cause the market deficit to moderate this year.

“But copper is not a metal where you can have a lot of visibility of the real stocks in the physical market,” Risopatron said. “That is because the stocks in the exchanges are marginal.”

“The supply situation was distorted last year with the buying from the Chinese government mopping up the market’s surplus,” Donskoy said, noting that this created a “strong deficit” that resulted in the quick price recovery in the second half of the year.

Mothersole said he believes that the copper market will likely remain in deficit for the time being before moving into a surplus in 2023 and 2024. “But the deficit that we are forecasting for the next couple of years isn’t of the magnitude that would necessarily trigger the strong price response that would be associated with a so-called super cycle,” he said.

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