Copper prices have rebounded strongly since hitting an 11-year low in March. After briefly trading below $2 per pound, the metal has recovered 50 percent of its value, as demand from China soars and COVID-19 hits supply from South America.
Rising Demand, Falling Supply
China’s manufacturing and construction sectors, which consume around half of the world’s copper, have posted a strong recovery from the COVID-19 shutdowns earlier in the year, with factory activity in August reached its highest level in nine years.
This recovery was reflected in a 50% month-on-month increase in unwrought copper imports by China in June to a record high of 656,483 tonnes, just over double the level imported in the same month of 2019. For the first six months of 2020, copper imports totaled 2.84 million, a 25 percent increase on the same period of 2019, despite the disruption caused by COVID-19.
The price of copper is also being supported by supply factors. The world’s two largest copper producers, Chile and Peru, continue to face severe COVID-19 outbreaks. In Peru, copper output fell by 42 percent in May, while Chile’s state-run miner Codelco has temporarily closed its largest smelter and refinery and suspended construction at its flagship mine.
Strong demand for the metal from China is expected to continue going forward, boosted by government stimulus measures. Tax exemptions and lower borrowing rates have been introduced for manufacturers to help the sector recover from the impact of the pandemic.
Government infrastructure spending is also expected to increase in 2020 to offset slower growth in other areas of the economy, with the 2020 National People’s Congress Work Report highlighting infrastructure and urbanization initiatives as a priority for the year ahead. The report said bonds worth 3.75 trillion renminbi would be issued in 2020 to finance the infrastructure program – a1.6 trillion increase from 2019. Both manufacturing and infrastructure are key consumers of copper.
Copper has long played an important role in China’s economy. Currently, China is the world’s biggest importer of copper by some margin, accounting for 43 percent of global copper ore imports – more than three times the level of Japan in second place.
While copper usage in China is primarily driven by the fact that it is an important component in manufacturing and construction, a number of ongoing government initiatives are expected to increase demand further.
Renewable Energy Demand
China’s switch to renewable energy systems is likely to be a key demand driver going forward. Copper is the best non-precious metal conductor of electricity due to the lack of resistance it offers. This property makes it an important component in energy-efficient generators and renewable energy systems, with solar and wind energy installations using larger volumes of copper than conventional thermal power generators.
Global copper demand for solar and wind energy systems is expected to rise by 56 percent by 2027 from 2018 levels, according to research by the International Copper Association (ICA). Although the ICA does not provide a breakdown for individual countries, it predicts China will maintain its leading role for annual installations of wind turbines.
In the short term, there could be a spike in demand for copper as projects are brought forward following the news from China’s Energy Administration that subsidies for new offshore and onshore wind farm projects will end sometime later in 2020 and 2021 respectively.
Electric vehicle production is also expected to drive China’s copper consumption. Copper is an important component in electric vehicles, used in the batteries, windings, and copper rotors of electric motors, as well as in the wiring and charging infrastructure. At an average of 83kg of copper, the typical electric vehicle uses nearly four times as much of the metal as a conventional car.
While electric vehicle sales have been subdued in recent months due to a combination of the COVID-19 pandemic and a reduction in government subsidies, China has ambitions to be a leading electric vehicle manufacturing center by 2025, as part of its Made in China 2025 initiative. Such a move would further support the demand for copper.
In fact, the government’s Made in China 2025 initiative, which aims to improve the country’s manufacturing processes to produce higher-value products, has wide-reaching implications for the metal. More efficient technologies tend to use larger amounts of copper, and, as a result, Made in China 2025 is expected to boost copper usage in the country by an additional 232,000 tonnes by 2025, according to the ICA.
It anticipates copper consumption increasing in a number of areas, including for higher efficiency industrial motors and distribution transformers, in the electrification of new railways, and for new energy vehicles for industrial use.
Copper Derivatives Prices
The rebound in copper prices has led to COMEX copper futures going from a large net short to a fairly large net long. Over the medium to longer-term, the great importance of copper to China’s economy could support prices.
As the world emerges from the COVID-19 pandemic, and demand for the metal in China is positioned to move higher, market participants will find a greater need to hedge exposure to copper. The global economy, too, might identify higher or lower growth based on copper’s wide use and unique demand patterns.
About Sachin Patel
Sachin Patel Sachin Patel is the Senior Director of Metals Products for CME Group. He is based in Singapore. This analysis was first published on Open Markets, the digital magazine of the Chicago Mercantile Exchange.