Copper price surge is not because global economies are booming. Copper’s gain has been driven largely by concerns over strains on supply from key producers South America
Base metals witnessed the biggest rise on a weekly basis as prices bounced back to pre-coronavirus crisis levels backed by the resurgence of Chinese demand.
Copper has been on a roll, surging past its 12 month-high. On a weekly basis, the prices have risen 6 percent and are up 8 percent month-on-month despite the rising number of coronavirus cases in the US and other regions.
New bank lending in China, the biggest metals consumer, rose 22.3 percent to 1.81 trillion yuan ($258.29 billion) in June which is providing liquidity and boost to consumption. Also, US producer prices unexpectedly fell, pointing to subdued inflation that should allow the Federal Reserve to keep pumping money into the economy which is favourable for metals.
The surge in copper price is not because global economies are booming. Copper’s gain has been driven largely by concerns over strains on supply from key producers South America. Thousands of copper workers have fallen ill in Chile, which is by far the world’s largest producer of the metal, accounting for more than a quarter of global supply. Mines have postponed non-essential activities and is reduced their labour force in an attempt to keep workers safe without forgoing too much output. Mines were expected to almost be back to pre-pandemic levels by the end of the month following a phased restart, but that looks to be overly optimistic. Meanwhile, demand in China is recovering with factories ramping back up in the second quarter.
On the contrary, The IMF downgraded its global forecast and a resurgence of COVID-19 infections forcing governments around the world to re-impose business-crippling lockdowns.
Large copper smelters in China are boosting output and taking market share from smaller ones that are closing. Overall smelting activity in China, was only slightly down in June MoM despite a large number of closures. It seems clear that operating margins are being pressured by rising input prices in China which is forcing some smelters out of the market. But at the same time, we are seeing aggressive increases in activity at some of the larger operators which suggest that demand has remained robust in China.
Copper stocks in Shanghai Futures Exchange's warehouses increased by 20,018 tonnes to 1,37,336 tonnes but remained far below their peak in March. While on-warrant stocks in LME-registered warehouses fell by 6,200 tonnes to 88,600, the lowest since Jan. 16. Cash copper has flipped to a premium against 3M metal on the LME, suggesting tighter nearby supply. Also, speculators' net long in LME copper rose to 12.4 percent of active contracts.
The key question now is whether the buoyant fundamental outlook will hold up in the face of broader concerns about global growth as the virus rages. If governments are forced to tighten lockdowns yet again, economic activity will be jolted. Copper prices have already rallied around 46 percent from lows hit in March 2020 and are close to levels of $6,500, but holding on to these levels needs to be complimented by very strong demand-side story
The author is VP – Commodities Research at Motilal Oswal Financial Services.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.