Copper prices may rise further on Chinese demand, decarbonization efforts

Copper has gained nearly 25 percent year-on-year but since March-end, when it slipped to a low of $4,500 a tonne the metal has gained 75 percent.

December 22, 2020 / 07:36 PM IST

Copper prices, which have surged to an eight-year high on the London Metal Exchange (LME), may gain further on demand from China and efforts of decarbonization by various governments to reduce reliance on fossil fuels.

In India, copper prices on the MCX hit a record high of Rs 617.45 a kg during the weekend before retreating to Rs 601.75 on December 22 after global markets slumped on fears of a mutant variety of novel Coronavirus detected in Europe causing further setbacks to the economy.

Copper has gained nearly 25 percent year-on-year but since March-end, when it slipped to a low of $4,500 a tonne the metal has gained 75 percent.

The metals market had been looking forward to a stimulus package from the US government. This $900 billion package was approved by the Congress on December 21.

But the Americans have expressed disappointment over the package as only those drawing a salary below $75,000 per annum will receive the $600 payment.

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Dutch multinational banking and financial services group ING said that funds have turned enthusiastic on copper, especially due to copper’s increasing usage in electrification, which had a long-term prospect.

The electrification has been linked to decarbonization and energy transition.

Citi global head of commodity research Ed Morse and ING senior commodities strategist Wenyu Yao see new developments on the decarbonization front providing long as well as medium-term support for copper.

Most of the European nations have targeted to cut carbon emissions by at least 55 percent by 2030 compared with the levels in 1990, giving hope for further headway in copper.

The UK is pursuing an aggressive target of ending vehicles running on diesel and petrol on its roads by 2030, which would mean more measures favouring renewable energy and electric vehicles.

A car running on petrol requires nearly 25 kg of copper currently due to increased use of electronics in the vehicle. An electric vehicle, on the other hand, will need about 80 kg of copper.

Though the demand spurt will not happen overnight, analysts say that metals will witness a stronger demand due to demand for renewable energy and electric vehicles which will dominate the commodities market over the next decade or two.

Data from US’ Commodity Futures Trading Commission and LME’s commitment of traders show that fund managers have gone long on copper with net position rising to a three-year high, ING’s Yao said.

In addition, she said that reportable inventories at LME and Shanghai Exchange have continued to drop.

The other key indicator of robust demand for copper that ING and Citi point out is China’s exports of air-conditioners and refrigerators.

Citi, an investment bank, said that the freezer was the primary reason for the increase in copper consumption with freezer output in China increasing 80 percent.

Producers of air-conditioners and refrigerators increased the use of copper tubes and pipes by 4.28 percent month-on-month in November. Electric car sales were 3.42 lakh in October, near September record of 3.45 lakh.

Besides, there is demand from Beijing for the construction sector. Tight supply due to lack of investments in new mines has also resulted in shortage, thus lifting the prices.

Singapore-based multinational bank DBS said China’s 11 percent growth and its recovery in the manufacturing and automotive sectors this year have helped a 3.6 percent increase in copper demand this year.

The demand growth comes on top of an estimated 4.13 lakh tonnes deficit. Though copper production could rebound next year with a 3.5 percent increase, the world would still face a deficit of 2.43 lakh tonnes, the Singapore-based bank said.

It also projected a long-term upside for the metal in view of the strong demand for electric vehicles.

(Subramani Ra Mancombu is a journalist based in Chennai, who writes on topics in commodities and agriculture)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Subramani Mancombu is a journalist based in Chennai who writes on commodities and agriculture

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