Copper or Doctor Copper as market analysts refer to it due to its reputation of having a “Ph.D. in economics” because of its ability to predict the direction of global economy, has tumbled significantly in the recent past and is currently trading at its 15-month low on the London Metals Exchange (LME). The past trends of copper prices and global economic growth have signified that both the copper prices and global economy move in tandem and one can predict the turning points in global economy based on the direction of global copper prices.
Experts are of the opinion that the correlation between copper prices and global economic health does largely hold good, though, at times there might be some brief aberrations. “Aberrations may occur due to governments’ interventions in the form of fiscal stimulus, or the major central bankers’ trying to respond to the changing macro-economic conditions by the way of change in their monetary policies”, said Praveen Singh, AVP, Fundamental Currencies and Commodities Analyst at Sharekhan by BNP Paribas. However; anomalies and aberrations eventually disappear over course of time, thus reputation of copper as an indicator of global economic health remains untarnished.
“Drawing a recent analogy between global economic growth and copper prices, the red metal hit its multi-year lows in March 2020, amid the peak of the Covid-19 pandemic which pushed the global economy into a contraction phase”, said Sugandha Sachdeva, VP- Commodity & Currency Research, Religare Broking Ltd. “However, copper prices started to rebound and as a precursor to economic recovery gathering pace amid pandemic concerns gradually subsiding and reopening of major economies”.
Copper is one of the most widely consumed commodities across various sectors of the economy. It finds application in homes, factories, electronics, power generation & transmission etc., thereby almost covering the entire gamut of industrial and electrical productions. Thus, it is one of the leading indicators for economic health.
“Generally, rising copper prices indicates strong copper demand and hence a growing economic activity. On the contrary, decline in copper price generally shows sluggish demand and economic slowdown”, said Rajnath Yadav, Research Analyst, Choice Broking.
Movement in Copper Prices
LME Copper prices hit record highs at $10,845/tonne in early March 2022 and closed with 6.7 percent gains in Q1FY23 over Q4FY22, as Russia-Ukraine conflict intensified fears of tight supplies amid already dwindling inventories.
However, fortunes reversed in the second quarter with signs of global economic slowdown and fears of a recession in the United States pushing LME Copper towards $8,600/tonne, lowest since February 2021 and a decline of more than 21 percent from its peak.
What is pushing the prices down?
Demand concerns arising out of resurgence of COVID in China in late March far outweighed supply side discrepancies, leading to a sharp pullback in prices in Q2.
According to Yadav of Choice Broking, “this current weakness in the copper price is mainly due to the fast-rising interest rates across the globe, which is putting strains on the economic expansion”. Further, the rapid normalization of the policy rates is creating near-term concerns on economic slowdown & recession fears which are negatively impacting the demand of copper.
It may be noted that China is responsible for about 50 percent of the world’s copper consumption. “China’s commitment to Zero COVID policy turned out to be very costly as the mainland nation was already struggling with a lingering real estate sector crisis, forcing the authorities to set its 2022 growth target at 5.5 percent, its lowest level in nearly three decades”, said Ravindra Rao, CMT, EPAT, VP- Head Commodity Research at Kotak Securities.
Taking into consideration the lingering after-effects of COVID19 pandemic, supply chain issues and increasing price pressures globally, World Bank and Organization for Economic Co-operation and Development (OECD) have already downgraded 2022 global growth forecast to near 3 percent.
“IMF is also expected to cut its forecasts for the third time this year following a sharp 1 percent cut to 3.6 percent in April and this does not bode well for Copper as it is known to have a macroeconomic bias”, added Rao of Kotak Securities.
One of the other major reasons that is capping gains for copper is strength in the dollar against its major crosses. “Once the economy stabilizes and digest the changing scenarios, the downside for copper could be limited”, said Navneet Damani, Sr. Vice President - Commodity & Currency Research, Motilal Oswal Financial Services.
“Rise in the U.S Dollar is generally also considered as a negative signal for Copper prices”, concurred NS Ramaswamy, Head of Commodities, Ventura Securities Ltd.
Most of the macro-economic releases of the US economy in the last two months have been disappointing which has added to the bearish sentiments.
Demand-Supply headwinds
Supply side in copper remains tight as World’s top producers, Chile and Peru, which together represent about 40 percent of the global supply, have been witnessing major supply disturbances in 2022.
Chile Copper output continued its decline in the first four months of 2022, and fell by 7.4% to 1.698 million tonnes from 1.834 million in the same period last year. Although Peru has reported marginally higher production figures in January-April 2022, 20% of its output is still at risk owing to tensions at major mines.
As per the latest report of International Copper Study Group (ICSG) released on June 21, refined copper market balance, in the first four months of 2022, was in a preliminary surplus of 95,000 tonne. If adjusted for changes in Chinese bonded stocks, the surplus stands at 213,000 tonne.
The global copper consumption grew about 2.20% in the first four months of 2022, while global refined copper consumption increased about 3.40% in the same period.
However, as per the ICSG, the global refined copper market is likely to see a surplus of 142,000 tonne in 2022, and 352,000 tonne in 2023.
Outlook
From the 7th March 2022 price of $5.02 per pound, copper is down by more than 25 percent to its current price of $3.727. “The 7th March 2022 high correlates to Feb 2011 all-time high, but in 2011 post this high the prices halved”, said Ramaswamy, Head of Commodities, Ventura Securities Ltd. Will it happen again now? “Short term bounce is possible (sideways) but the trajectory is for further down-trending losses”, he added.
Experts are of the opinion that copper prices may decline another 10 percent to $7500 level in near-term on the bearish factors discussed earlier. However, medium term prospects of the metal are quite promising on rising demand and restricted supply. “Green energy transition is quite positive for the metal. Demand from Electric vehicle, energy storage sectors, wind power generation, uses in solar photovoltaic panels, etc hold a great potential for copper prices in coming years”, added Singh of Sharekhan by BNP Paribas.
Yadav of Choice Broking concurred and said that, “in the medium-term considering the role of copper as a commodity in the process of world transitioning from fossil fuel to renewables, we feel that the copper prices would remain higher than the 5-10 year’s average prices”.
“Also, copper prices direction and the metal industry is awaiting Chile’s completion of a new constitution plan to nationalize key parts of its mining sector”, added Ramaswamy of Ventura Securities.
The constitutions final draft is expected by July 4 and referendum approval or rejection by Sept 4. This becomes an important weighing factor for the copper prices going forward.
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