By Yash Sawant
The recovery story of copper has been eye catching as the red metal made up all the lost ground on strong fundamentals.
Despite the shackled global economy, copper, often used to gauge the health of the overall economy, climbed about 50 per cent on the LME in the past months after hitting its lowest in more than four years in March’20. (CMP: LME Copper: Rs 6,435)
The impressive bull run was majorly supported by three pillars: stellar recovery in China’s economy, mounting strains on supply from key producers and massive stimulus programmes by global central banks.
The demand engine: China
Copper clawed its way back in the second quarter of 2020 as China’s economy began to revive from the pandemic triggered slowdown. Halt in China’s manufacturing activity reflecting the Covid-19 led lockdowns pushed the copper prices lower in early months of 2020.
While China’s economy gradually recovered from the pandemic, the virus branched out to over 200 nations hampering the global economic growth. Most countries announced a nationwide lockdown in an attempt to combat the lethal virus breakout destructing the demand for copper and other industrial metals. However, robust growth in China’s industrial and service sector underpinned copper prices.
China’s factory activities improved for the fifth consecutive month in July’20 despite the resurgence of coronavirus and disruptive flooding. China’s official manufacturing PMI rose to 51.1 in July’20 from 50.9 in June’20 beating the market expectation of 50.7.
The bullish trend in the red metal was further supported by China’s scrap import quotas. Copper scrap accounts for a huge chunk of the global copper market. Due to strict norms on scrap imports by the largest scrap buyer (first introduced in 2018), global scrap trade flows witnessed a significant plunge. The fragile global scrap supply chain was further disrupted by the pandemic, which raised worries of a possible deficit in the global copper market.
Stimulus measures by global central banks amid gradual recovery in China’s economy kept industrial metal prices elevated, but bleak global demand and mounting concerns over the US and China relations undermined the industrial metals.
Relations between the world’s biggest economies the US and China worsened at an alarming rate in 2020. From issues over China’s handling of the coronavirus outbreak to its imposition of a new security law that curbs the rights of Hong Kong citizens, tension escalated between the superpower nations.
Situations further worsened after the US ordered China to shut its consulate located in Houston to protect American intellectual property and private information. The move by the US was a severe blow on the diplomatic ties between both the nations. China retaliated by ordering the US to close its consulate located in the southwestern city of Chengdu.
Major central banks infusing massive stimulus packages to counter the economic fallout caused by the pandemic and stellar recovery in China’s economy are the prime reasons behind rising industrial metal prices.
However, resurgence of the lethal virus and intensifying tension between the US and China might hamper the outlook for copper and other industrial metals.
Moreover, easing of supply disruptions in Chile and Peru, key copper producing nations, might further pressurize the red metal prices.
Considering the solid growth in demand from China and revival in the manufacturing sectors of major economies like the US and Eurozone, we expect Copper prices to trade higher towards Rs 530 per kg in a months’ time (CMP: Rs.513).
Yash Sawant is Research Associate, Angel Broking Ltd.