China’s Energy Crisis Hits Copper Prices

Copper prices have followed a downward trend after China, the largest consumer of metals, began to suffer an energy supply crisis, which suspended activities in factories and created uncertainty in demand for the metal.

In recent months, energy restrictions in China have affected the supply of metals. However, with the strengthening of electricity restrictions, the demand for metals in other sectors such as manufacturing has expanded. Recently, China's shares have fallen, while the yuan has weakened, driving down the country's economic growth projections for 2021, reported Reuters.

The situation in China has fueled uncertainty among investors, who want to reduce exposure in the volatile market environment. In addition, there are other factors that are contributing to this uncertainty such as that central banks are preparing to reduce stimulus and the risks that the US might fall into a financial crisis, reported Reuters.

Last month, copper prices were also affected by China, after factory output and retail sales in China rose less than expected in July. Retail sales increased 8.5 percent year-on-year versus the median estimate of 10.9 percent, while industrial production increased 6.4 percent year-on-year versus the median estimate of 7.9 percent, reported MBN.

Despite copper gaining momentum in 2021, especially after the industry realized copper´s role in producing renewable energy, the situation in China has affected prices and demand.  The new virus restrictions introduced to contain fresh outbreaks has had a negative effect on retail sales. In addition, China’s January-to-July copper import volumes dropped by more than 10 percent compared with the first seven months of 2020. In addition, the biggest copper buyer in the world bought 3.219 million tons of unwrought copper and copper products from January to July were down 10.6 percent compared with the same period in 2020.

However, experts believe the situation in China is not a risk to the mining industry. “The supply-demand equation for copper is very tight, even amid market-wide uncertainties fueled by Chinese property turmoil and a global energy crunch. Supply and demand in the coming years should remain fairly tight so prices should be not extraordinary, but good — higher than long-term projections,” said Diego Hernandez, a former Chief Executive of Codelco and Antofagasta Plc.

Like all countries, Mexico’s copper demand and supply are being impacted by the current market environment. In 2020, Mexico lost participation in the global production of gold, copper, zinc and lead. According to CAMIMEX, from 2019 to 2020, the country's participation in gold production decreased from 3.3 percent to 2.9 percent, in copper it contracted from 3.9 percent to 3.4 percent, in zinc from 5.5 percent to 5.2 and in lead from 5.5 percent to 5.3 percent.

Despite the uncertainty, experts believe that copper will improve their situation, considered the metal of the green revolution. “I believe that the future of the industry, society and our lives will depend heavily on copper, as there is no other replacement for it. Perhaps silver could be an option, but it is more expensive. As a result, copper will be the metal that leads the world’s green transition,” Steve Robertson, CEO of Infinitum Copper, told MBN.