China’s Infrastructure investments to sustain copper rally.
Despite a precipitous plunge in March, the price of copper has risen 7.6% since the start of 2020 and looks set to maintain momentum in the coming months and beyond as China's economic recovery gathers steam.
Copper prices plummeted from a high of US$6,270 per tonne in mid-January to a low of US$4,617.50/t in late March after the World Health Organization declared the spread of COVID-19 to be a pandemic but has since recovered to levels last seen in 2018.
China's appetite for industrial metals returned swiftly as the world's leading copper consumer shook off the pandemic with a sustained recovery thus far. Despite dipping month over month in August due to seasonal factors, China's unwrought copper imports remained higher than a year ago, which suggests that manufacturing activity in the country is still rebounding, BCS Global Markets said in a Sept. 8 note.
While the pandemic is expected to wipe US$630 billion off China's GDP in 2020, the Asian powerhouse's GDP is still expected to rise by 1.2%, down from S&P Global Ratings' previous forecast of a 5.7% increase, even as the world economy contracts by 3.8% overall.
China's recovery is being driven by three things: stimulus-related infrastructure investment, the electronics sector, and sales and new investment in property, S&P Global Ratings' Asia-Pacific chief economist, Shaun Roache, told Market Intelligence. "This mix of demand is certainly boosting demand for coal, iron ore, and a range of other commodities, including copper. As Chinese consumers start to spend again, we would expect stimulus to wane but this is more likely to affect 2021."
Infrastructure investments driving up prices
"Infrastructure investment is significant to copper demand, as the metal is heavily used in a wide range of the end-uses impacted such as building materials all the way through to consumer durables," Market Intelligence commodity analyst Thomas Rutland said in an interview.
In the wake of the global financial crisis, copper prices crashed to as low as US$2,809.50/t in December 2008 but rebounded quickly to a peak of US$10,179.50/t in February 2011 after China funneled funds into infrastructure such as railways, roads, and airports.
"China's Ministry of Transport has recently committed to huge investments in its transport systems, which combined with the government's stimulus measures could be behind the reported stockpiling of metal in the country," Rutland said.
The price of the metal has averaged US$5,790/t so far this year, according to Fitch Solutions, which recently raised its 2020 price forecast for the base metal to US$6,000/t in 2020 from US$5,900/t.
Bernstein Research is more bullish than most on the metal and predicts the price to reach US$6,400/t in 2021 and US$6,900/t in 2022, versus analysts' consensus of US$5,478/t and US$6,261/t, respectively, according to a Sept. 14 note.
While Fitch expects the Chinese government's stimulus as well as recovery in global economic activity to sustain demand, prices are likely to remain volatile as the pandemic evolves. The analytics provider sees downside risks to its updated price forecast of should widespread lockdowns reappear, according to a September report.
"A couple of the key questions are: just how far will the Chinese recovery and stockpiling take copper prices? Will copper prices continue to be pushed higher into 2021 or will prices start to fall off as refined output increases during the third and fourth quarters?" Rutland said.
Copper shortage seen as push for decarbonization intensifies
The closure of some mines, particularly in South America, due to the coronavirus pandemic has offset reduced demand, keeping the market tight. As of late September, 2.9% of annual supply remained disrupted by the pandemic, with Chile and Peru accounting for more than half of the missing 702,000 tonnes per year of output, VTB Capital said in a Sept. 21 note.
The brokerage highlights the transition to renewable energy stoking demand for the metal. Renewable energy assets require as much as 15 times more copper per unit of installed capacity than conventional power sources, according to Bernstein's analysts, and the transition to a low-carbon energy mix will result in a copper shortage as demand outstrips supply.
BHP Group, whose copper segment contribute an average of 24% to group revenue, expects demand for the metal to more than triple over the next 30 years, under the 1.5-degree-C scenario of the Paris Agreement on climate change, versus the past three decades as global efforts to decarbonize gain momentum, according to a September presentation.
The ICSG estimated the apparent deficit of refined copper in the first half of 2020 at 235,000 tonnes, and analysts expect it to grow over the coming years. Fitch estimated the shortfall to reach as much as 510,000 tonnes in 2027 as power, vehicle, and infrastructure usage increases.
Source: S&P Global Market Intelligence