Does copper’s latest price jump signal economic recovery, latent demand or China’s stockpiling?

Copper is facing a unique scenario as China moves to dominate trade, amid a healing economy and predicted major deficits.

As one of the world’s most traded metals copper has surged to a seven year high this week of US$7,674.5 per tonne on the London Metal Exchange, leaving speculators debating if it was Dr Copper’s signal of a healing economy, latent demand, or Chinese stockpiling in an attempt to control the market.

China has been accused of “panic buying” copper in recent months, while at the same time it has pared back its US dollar exposure and launched its yuan-denominated copper futures contract to international traders.

The new copper futures contract began trading last month through the Shanghai Futures Exchange’s subsidiary Shanghai International Energy Exchange and is the city’s first copper contract open to foreigners.

With copper one of the world’s most traded metals, the new contract could see a lot of money changing hands and give China the pricing power it seeks by extending the yuan internationally and curbing the US dollar’s reach.

Earlier in November, Chinese President Xi Jinping said efforts should be made to enhance the country’s influence on commodity prices to better serve its economy.

China Securities Regulatory Commission vice chairman Fang Xinghai said the new contract is likely to become a pricing benchmark for the Asia Pacific region – which will facilitate the country’s overall global influence on commodity prices.

As the world’s largest copper consumer, China scoops up at least 50% of global refined production.

However, the nation imports about 80% of its annual consumption needs – around 11 million tonnes.

Global copper demand reached almost 24Mt in 2019.

According to Bloomberg, China’s copper imports for 2020 have already exceeded 2019 levels.

Driving some of this consumption is China’s recent infrastructure stimulus with 1,500 billion yuan allocated to fund infrastructure projects.

It is also widely touted that copper stockpiling was included in China’s latest five-year plan but details confirming this won’t be available till next year.

The International Copper Study Group estimates copper stocks held on the SFE were up 13% in October 2020 compared to December last year.

China puts squeeze on Australian exports

It is not unfathomable that China is hastily moving to corner the copper market, as it has previously wielded its power over trading partners and other metals in recent years.

Australian exporters are already facing the fall-out of tensions between the federal government and China’s administration.

Friction between Australian and China has been heating up since Australia joined a chorus of other countries requesting an international enquiry into China’s handling of the COVID-19 outbreak.

It wasn’t helped by the fact Australia had also banned China’s Huawei 5G mobile network.

In retaliation, China has slapped tariffs and boycotted Australian products including wine, barley, meat, and seafood along with curbing coal purchases.

This equates to about $21 billion of Australia’s almost $150 billion exports to China.

One of the latest Australian exports China has chosen to boycott is copper. More than 50% of Australia’s mined copper is shipped to China, however, Australian copper exports account for less than 5% of China’s needs.

Copper’s trajectory through the pandemic

China was one of the first countries to recover from the COVID-19 pandemic, with economic data indicating the country is on track to report positive GDP for the full year.

Copper stocks on the London Metal Exchange closed out January at 179,800t and commanded an average of US$6,049.20/t.

As COVID-19 rocked the world, inventory built up and the price plunged to a low of US$4,617.50/t in March.

By the end of May, copper LME inventory had risen to 255,725t.

However, global copper mine closures prevented excess supply hitting markets, and increased Chinese buying pared back inventories to 126,675t at the end of July.

Copper chart December 2020 China demand supply
The copper price has rebounded with strength since the COVID lows earlier this year.

This still pushed the price back to pre-pandemic levels and the metal attracted an average of US$6,353.76/t that month.

LME inventory continued to erode in August and the start of September, caused by what some analysts described as Chinese “panic buying”.

The metal’s stockpiles on the LME have since rebounded to 149,800t, which can be attributed to recovering global production.

Meanwhile, the copper price steadily rose throughout November – starting the month under US$6,750/t and ending it at US$7,674.5/t.

Healing economy or fundamental demand?

Analysts have been touting for several years that the copper market was headed for a situation of increased consumption and depleting production.

A much-anticipated renaissance for the commodity has been stunted in recent years by the trade war between China and the US – followed by the pandemic.

Although inventory has levelled out to pre-pandemic quantities, the metal’s price has not only recovered, it has pushed past to reach a multi-year highs.

The metal is often referred to as Dr Copper and is frequently used as a signal of economic health due to its wide-spread use across homes and most sectors.

Many commentators expect the higher price can be attributed to improving economic sentiment – with several vaccines due to be rolled out next year.

Adding to the situation is new US President-elect Joe Biden, who many believe will provide stability and repair strained relations with the world’s second largest economy when he is officially sworn into office next month.

One of Mr Biden’s policies is to re-join the Paris Climate Accord and invest in renewable technologies – which require lots of copper. Electric vehicles, alone, require more than 83kg of copper – which is four times more than a traditional combustion engine car’s needs of 22.5kg.

In renewable energies, the International Copper Association claims a single wind turbine needs 862kg of copper.

Analyst Roskill predicts copper usage will grow from 4kg per person to 5kg by 2035. The analyst attributes this growth to ongoing urbanisation and electrification globally and increased investment in renewable energies including electric vehicles.

Meanwhile, on the supply side, trade tensions and the pandemic have kept the metal’s price subdued.

The subdued price and ongoing volatility have also made it harder for aspiring miners to lock-in finance for advanced projects, which will also impact global supplies as the years progress.

Additionally, existing operations are aging, going deeper and battling declining ore grade and reserves.

It is difficult to accurately forecast where copper demand is heading – particularly with electric vehicle and renewable energy penetration levels hard to pinpoint.

Using a high demand scenario, global copper miner Teck predicts a possible 3.1Mtpa gap in required copper by 2025. On a base demand scenario, the gap is estimated at 2Mtpa over the same period.

Meanwhile, Codelco’s view is that new projects are needed to fill a forecast 4Mtpa demand gap by 2028.

The copper giant even anticipates that if all probable projects were developed, they would not be sufficient to close the gap.

Interesting times ahead

There certainly will be interesting times ahead in the copper market.

China is attempting to control pricing to meet its own requirements in a market that has been predicted to be heading into a major deficit for years.

Adding to that are grassroots signals from Dr Copper that the global economy is on the mend.

Although no precise forecast can be made, the scenario the commodity is facing will definitely be unique.

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