Copper gets a warning the worst may be yet to come

The question, posed by analysts at Commerzbank in the title of a May 28 research note, captures the latent optimism the worst of covid-19 may be over for industrial metals such as copper.

The current London Metal Exchange (LME) copper price of $5,360 per tonne may be down by 13% on the start of January but it has also staged a significant recovery from its March low of $4,371.

The focus is on recovering activity in China rather than downturn in the rest of the world. Beijing’s stimulus package, centred on “new” infrastructure such as electric vehicle charging points, should be positive for copper demand.

China’s continued strong imports and relatively flat global exchange stocks reinforce the positive optics.

But, Commerzbank warns, “this optimism is premature in our opinion as we believe that the worst is yet to come.”

The bank is not alone in this view.

The International Wrought Copper Council (IWCC) is expecting a surplus of almost one million tonnes of metal this year and next.

Demand hit outweighs supply hit

Clearly, making any form of forecast right now is challenging given fast-moving dynamics on both the supply and demand sides of the copper balance sheet.

However, with 150 members drawn from the copper fabrication sector, the IWCC is in as good a position as anyone to try to throw a light on copper’s fundamental landscape.

The Council’s twice-yearly update on the copper market is often overshadowed by that of the International Copper Study Group (ICSG).

The ICSG held no May meeting and published no spring forecasts this year but has contributed to the IWCC’s supply-side calculations.

Unsurprisingly, given the level of lockdown disruption in key producer countries such as Peru, global mine supply is expected to fall by 4% this year. That will translate into a 2.4% drop in production of refined metal.

However, the covid-19 supply shock will be exceeded by the hit to demand, the IWCC suggesting global usage could fall by as much as 5.4% in 2020.

Hardest hit will be Europe, where usage is projected to slide by 6.4% this year, and North America, facing a 6.9% slump in demand relative to 2019.

Even in China, where activity appears to be recovering and stimulus spending is building, copper demand is expected to fall by 2.8%.

The IWCC’s figures imply a copper surplus of 285,000 tonnes this year and a much bigger 675,000 tonnes next year.

Where’s the surplus

A surplus of copper isn’t obvious right now.

Global exchange stocks currently total 461,500 tonnes, which is only 54,9000 tonnes higher than this time last year.

Rises in LME and CME inventories have been almost totally offset by declines on the Shanghai Futures Exchange, where registered stocks have fallen by 219,000 tonnes over the course of April and May.

That speaks to China’s post-lockdown restock.

So too does the strength of the country’s refined copper imports, up 4% at 1.19 million tonnes in the first four months of the year, although higher import flows may be partly down to a near collapse in scrap supplies. Imports of copper scrap totalled just 292,400 tonnes in January-April, down 43% on last year.

A shortage of recyclable metal may be accentuating the need for primary refined metal.

China’s call on metal imports seems set to run for a while, judging by the volume of copper being prepared for physical load-out in LME warehouses in South Korea and Taiwan.

The ratio of so-called “cancelled” stocks at the South Korean port of Busan stands at 68% and that at Taiwan’s Kaohsiung at 64%.

At face value, it all looks like a repeat of the last global crisis in 2008-2009, when China’s shock-and-awe infrastructure stimulus drove copper to all-time highs above $10,000 even as the rest of the world was struggling to rebuild.

Reasons to be fearful

The comparison between now and then is tempting for copper bulls but there are reasons to be cautious that history will not repeat itself, even if there are familiar echoes.

Although Beijing’s latest stimulus package ticks a lot of copper boxes, there will be no liquidity flood and construction boom such as seen a decade ago.

Then there is the problem of what China is going to do with all the copper-containing products, such as air-conditioners and white goods, it normally exports.

The coronavirus’ second-round hit on demand, in the form of Western consumer appetite, looks set to be bigger than the direct impact of lockdowns.

China’s factories suffered a collapse in export orders in April, according to both official and Caixin purchasing managers indices.

Weak exports are the point of maximum weakness for China’s copper sector, although it could take several months before a build in product inventories works its way back up the value chain to the refined metal segment.

Evidently, things won’t be helped if the simmering trade dispute between the United States and China re-erupts, as seems quite possible given the escalating rhetoric from the White House.

Meanwhile, the disruption to production caused by national quarantine measures is fading.

Restrictions on mining activity in Peru, for example, are gradually being lifted and although the country’s metals production is expected to fall by up to 15% this year, the worst of the lockdown effect has already passed.

Supply disruption has helped copper bounce back from the March lows but its positive impact on market sentiment may not last too long.

As production recovers, the market will refocus on the state of demand, which judging by the IWCC’s assessments, is not going to bounce back in anything like the same way.

Everything, of course, still depends on the coronavirus.

The IWCC noted its “forecasts have wider tolerances than would normally be the case” because of the core covid-19 uncertainty.

Things could pan out better than currently expected.

Then again, they might not.

Even as it stands, the copper market may be heading for stormy waters, although the price isn’t saying so right now.

(Editing by David Evans)