Copper price rises to over two-year high — is the surge fizz or substance?

The copper price breached $7,000 per ton this week, reaching $7,034 per ton on the LME — the highest level since June 2018.
What does this tell us? Is demand robust and supply constrained?
The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

China’s recovery boosts copper price

Well, the world’s largest consumer, China, is certainly back to positive GDP growth. Its recovery from the pandemic lockdowns has been rapid and ahead of the rest of the world.  The country’s early application of infrastructure investment aided the recovery, which in turn boosted demand.
Higher refined metal imports support the impression China is on a 2009-2010 type stimulus led ramp-up in demand.
The reality is it will be much more highly nuanced this time, but a good story takes some discounting.

Supply side struggles

On the supply side, the pandemic has disrupted production in major copper-producing countries, like Chile.
Antofagasta advised this week their third-quarter production would be down 4.6%, according to the Financial Times.
The miner is not alone.
BHP, Glencore and Anglo American are also facing the same supply market risks. The whole Chilean market faces the risk of higher taxes and tighter water controls if Chile’s proposed re-writing of the constitution goes through.
An obvious marker driving copper price support is inventory levels. However, MetalMiner research has shown inventory and price have a very poor correlation on anything other than a short-term basis. Copper’s increased refined imports this year have in part gone to the restocking of China’s copper stocks rather than actual demand.
The Financial Times reports China has stockpiled 800,00 tons this year. At the same time, falling LME stocks are cited as evidence of metal shortage. However, what we are really seeing is a repositioning of inventory from outside China to inside China.
Is that demand or just speculative build?

Investors bullish on copper

So what about copper prices — are physical buyers fighting for supplies driving up the price?
No, the rise in prices is largely due to investors seeing the prospects for copper improving and wanting a slice of the upside.
There have been countless references to copper’s exposure to green technologies. The metal is needed to help economies meet renewables targets, electrification and electric vehicle demand.
Those technologies have barely begun to impact copper consumption to the extent analysts estimate they could.
Max Layton of Citicorp is quoted as saying copper consumption in the automotive and power sectors is set to grow by 2.3 million metric tons over the next five years, accounting for almost three-quarters of projected global demand growth. Layton added that on average an electric car contains more than three times as much copper as an internal combustion car.
Copper is also used in the wind turbines needed for emissions reduction and to connect renewable sources of generation to the grid.
Is copper’s rise overdone?
In reality, no, probably not.
Lockdowns outside of China have impacted copper demand in the rest of the world. Vaccine or not, the world will have to come to terms with the pandemic; demand will come back.
Fundamentally, the underlying global economy wasn’t in bad shape prior to the pandemic. Conditions remain supportive for a return to growth next year.
Speculators will view rising consumption as supportive of copper’s long-term bullish narrative. As a result, prices north of current levels remain likely for 2021.
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