Copper Soars, Might Experience Surplus

Copper fell to a four-year low last March, scraping the US$4,600/ton mark on the London Metal Exchange. Since then, the red metal has risen by roughly 17 percent and trades at US$5,376/ton at the time of writing. The main factor behind the increase is China’s ostensible recovery from COVID-19.

China is the top metals consumer in the world. Auspicious indicators are pointing to the Asian giant’s economy regaining its health. As reported by Reuters: “Sales of vehicles, a key demand driver for metals, in China are estimated to have risen 11.7 percent on the year in May, while the city of Wuhan found no new cases of COVID-19.” On the longer-term, Bank of America (BoA) analysts said to CNBC that “a rebound of activity in China was a positive sign for copper.” BoA went on to explain that “while Western economies may not completely mirror the rebound seen in China, the easing of lockdown measures would likely facilitate a rise in raw material purchases around the world. The current recession is different to the usual downturns on various other metrics: the epicenter is in services, not manufacturing; also, governments are gearing up to implement remarkable fiscal stimulus packages, reflected in China’s NPC and Europe’s Next Generation EU initiative.”

The question is how long copper can remain strong in a global environment marked by instability and economic sluggishness. Nicholas Snowdon, Analyst at Deutsche Bank in London, commented to Reuters: “You can understand the price path so far, reflecting a forced liquidation of shorts in the market, but I think that is broadly complete now. The key question for further upside is whether Chinese physical demand can remain as strong going into mid-year as it has been in the past three months. Realistically, there are seasonal headwinds that are likely to moderate the strength of that demand, at least in the near term.”

Andy Home, who writes a metals column for Reuters, voiced stronger skepticism. Drawing on the opinion of Commerzbank and International Wrought Copper Council analysts, Home says that the global copper market is set to experience a massive surplus this year and next. “Given the level of lockdown disruption in key producer countries such as Peru, global mine supply is expected to fall by 4 percent this year. That will translate into a 2.4 percent drop in production of refined metal. However, the COVID-19 supply shock will be exceeded by the hit to demand by as much as 5.4 percent in 2020. Even in China, copper demand is expected to fall by 2.8 percent.” The copper surplus could amount to 1 million tons in 2020 and 2021.

Statista reports that Mexico mined 751,000 tons of copper in 2018, making it the ninth-largest producer worldwide. Grupo Mexico is the country’s undisputed leader, churning out almost three quarters of total copper production that year. While a company of the size and strength as Grupo Mexico is bound to successfully navigate a potential downturn in the copper market, other producers like Sonora’s Cobre del Mayo or Baja California Sur’s El Boleo may find themselves in a tougher position. Much will depend on whether China’s manufacturing sector kicks in swiftly and finds markets able to take in its products.