China’s purchasing manufacturing data (PMI) has been released, showing an improvement from 52.8 in July to 53.1 in August. Manufacturing activity in the country is at its fastest pace in nearly a decade despite a weaker dollar.
This situation, coupled with falling inventories has helped boost copper prices to two-year highs. On 1 September, three month copper forwards on the LME was up 1.2% to 6,754/tonne, the highest level in two years. Other base metals including nickel, zinc lead was also given a boost off the back of increasing copper prices. On the 18th of August, we wrote that the zinc market was due for a rebound, and we are now beginning to see signs of a revival.
Is this price sustainable?
Whenever a market recovers from a slump, the first question that comes to mind is whether these prices are sustainable, or if this is merely an acute increase that will quickly reverse.
COVID19 hit the copper industry hard, causing a number of mines particularly in South America to be placed on care and maintenace. We see signs that these supply risks are now subsiding. Overall, 1H20 production declined by 20.4% y.o.y with Peru hit the hardest, while Zambia actually showed signs of growth, increasing by 5.8% y.o.y though from a relatively low base. Overall, as of July 31st, over 890,000 tonnes of copper production was disrupted in the first half of the year.
However, at the end of July, Peru’s labour statistics showed signs of a recovery and Codelco announced the restart of Chuquicamata smelter at is Chuquicamata mines. All this points to an easing of the supply constraints.
The red metal is a barometer for the health of the global economy. The IMF predicts the global economy to contract by 4.9% this year, levels not seen since World War II. Assuming this is correct, then we expect that global copper consumption in 2020 will contract by 19%.
Uncertainty remains
China has recovered to 80-85% of its pre-pandemic levels and Premier Li Keqiang told the National People’s Congress that there is more fiscal room to stimulate the economy further if necessary which makes us optimistic of a sustained recovery in base metal markets. However, other countries may not follow the same rebound seen in China.
Modest surplus over the next two years
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Overall we expect that demand will be more volatile than supply over the next two years as economies adjust and stimulus measures take time to come through.
Furthermore, the expected supply increase from Peru, Chile, Central Africa and Mongolia that is committed to come on stream over the next three years could tip the market towards a modest surplus. Long term demand from traditional end uses is expected to remain robust and if Western countries embark on an infrastructure-demand led recovery then copper prices should experience support.
