Restricted supplies amid increased demand from China will lift the sentiment but rising coronavirus cases and US-China tensions will be a worry
A recovery in Chinese industrial demand and timely economic stimulus measures from top consumer countries helped copper recuperate from the coronavirus-led selloffs. Besides, supply worries from Chile, optimism about the COVID vaccine, rising global equities and a weak dollar offered support to the widely used industrial metal.
Copper had fallen significantly through the first quarter of 2020 due to subdued global economic activity in the wake of lockdowns. At the benchmark LME platform, prices hit a two-year low of $4,370 a tonne in March but by the end of September, they had jumped to $6,877 on market optimism. MCX futures also jumped to an all-time of Rs 546 a kg during the same period.
The recovery rally in late March 2020 was mainly on the rebound in Chinese demand and reports of mine closures in Chile, the top producer, due to rising coronavirus cases. The industry-supporting measures taken by the US, Japan, the European Union and others also acted as a catalyst for copper.
Policy easing and fiscal stimulus actions taken by global central banks boosted industrial activities and thus the demand for copper. China’s central bank initiated an $80-billion monetary easing measures and pledged $559 billion worth of cost cuts to boost economic activities. The US Fed’s $2-trillion stimulus package and a cut in rates to near-zero also supported the global economic momentum.
The reopening of factories and revival in demand from the world’s top metal consumer China helped the recovery. After marking a negative growth in Chinese industrial production in the first quarter, sentiments improved in later days. Official manufacturing data from the country continued to expand for the sixth straight month in August, signalling recuperating industrial activities.
Even though COVID-19 led to a severe demand crisis for copper, there was a visible supply crunch in the form of mine and smelter closures due to lockdowns.
Copper was facing supply shortage even before the pandemic which shrunk further as the smelting activity in July tumbled to the lowest level in more than two years. Copper stocks depleted in major warehouses like LME, where the inventories dropped to the lowest since 2005. On Shanghai Future Exchange, stocks were on the higher side due to strong refining activity in China.
Copper concentrates exports from Chile plunged 20 percent YoY in July, pointing to supply worries dominating the market. Rising possibilities of a strike in Chile mines have worsened the sentiment. Tough restrictions on low-grade scrap imports to China have heightened the demand for mined material.
The global supply of refined copper remains short in 2020. Though mining resumed in major hubs, copper has only narrowed the deficit from 96,000 tonnes in April to 60,000 tonnes in May 2020.
Looking ahead, traders may largely focus on demand-supply dynamics and global economic outlook, which will directly influence prices. Restricted supplies amid increased demand from China will perhaps lift the sentiment but the rising virus cases and US-China tensions will be a worry.
(Hareesh V is the Head of Commodities at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.