A miraculous covid-19 recovery but Dr Copper needs more tests

Drilling at Kamoto UG copper mine, DRC. Image: Katanga Mining

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

Doctor Copper has staged a miraculous covid-19 recovery.

But with few signs the world economy is set for an equally impressive bounce back, he needs to remain under observation for any sign of a relapse.

London Metal Exchange (LME) three-month copper ended the first half of the year at $6,015 per tonne, up a whopping 38% from March lows and only 3.0% shy of the level at which it started 2020.

The rest of the base metals pack is also in recovery. Even zinc, the weakest performer, closed out June down “only” 11%, a resilient outcome given the metal was in bear mode even before the world woke up to the coronavirus.

Copper is still on the up, currently at $6,080 having cut year to date losses to just 1.5%, and bullish exuberance is spilling into the LME options market in the form of upside December call options with strike prices as high as $7,500 and $8,000.

The world, copper appears to be saying, is back on track after the covid-19 chaos.

That quite evidently isn’t the case, however, and Doctor Copper is going to need some further testing before he gets the all-clear.

Back to bull basics

Copper is currently trading two of its favourite bull themes, namely supply disruption and China.

The most recent extension of the recovery from March’s four-year low of $4,371 has been fed by concern over the spread of the coronavirus in Chile, the world’s top copper producing nation.

Covid-19’s impact on the production of all metals has been a bull counterweight to the hit on demand, with mines and smelters forced to reduce operations or curtail them altogether due to national quarantine measures.

The International Wrought Copper Council warned at the end of May it was expecting a cumulative surplus of almost a million tonnes this year and next

Tin, which tied with copper for best LME performer in the first half of the year, has been buoyed by the scale of quarantine losses among major producers of the soldering metal.

Copper mine production has been less affected than that of nickel or zinc but Chilean state producer Codelco’s curtailment of some smelting operations last week after fatalities among its workforce is a warning that the copper supply-chain is still at significant risk.

Then there is China, the demand driver.

China’s net imports of refined copper jumped 12% year-on-year to 1.38 million tonnes in January-May.

In part, that reflects global supply chain pressures with imports of mined concentrate up just 2%, the slowest rate of growth in five years, and imports of copper scrap collapsing by 48%.

Scrap flows have been a hidden casualty of covid-19 lockdowns and help explain why lead, which is particularly sensitive to battery recycling rates, has been another resilient performer.

In China’s copper sector, less scrap means both less refined copper production from secondary smelters and more refined copper demand from manufacturers who use it as a direct input.

In greater part, though, China’s increased import appetite is down to a sharp recovery in manufacturing activity.

Both the official and Caixin purchasing managers indices have bounced back from a precipitous plunge in February to regain a footing above the 50 level which signals expansion, with the improvement accentuated by a simultaneous copper stock-building impulse.

There has been much speculation that China’s state stockpiler, the State Reserves Bureau, has been topping up its strategic inventories of the metal.

While for now apparently just a part of the Shanghai rumour-mill, the chatter reinforces a sense that other players are building inventory in expectation of better times ahead.

Stimulus booster

Beijing has done its usual trick of encouraging such optimism with a spending splurge in metals-intensive infrastructure.

It all looks like a re-run of the financial crisis a decade ago when China came to the rescue of metals demand with a combination of massive stimulus and inventory build.

Sure, there is a consensus that Beijing’s latest cash flash isn’t going to be as big this time, but China isn’t alone in planning big industrial stimulus.

Global central banks are pumping money into the system and some of it is aimed at Chinese-style infrastructure builds.

Leading the way is the European Union with a proposed 150-billion euro “Green Deal” aimed at copper-intensive sectors as such as electric vehicle charging infrastructure.

Bullish cocktail

Supply disruption, strong Chinese imports and an acceleration of future “green” demand form the bullish cocktail propelling copper’s recovery.

It’s a story investors are starting to pick up on with funds lifting their net long positioning on the CME copper contract to 17,426 contracts last week, the most bullish collective positioning since March last year.

Supply-side news makes the headlines. Demand-side dynamics are often less visible

But copper’s rosy outlook could yet come undone as it is quite clear that the world is by no means over the coronavirus.

Fatalities in the Chilean copper sector underline the viral risk to the supply chain but a resurgence of cases in the United States should serve as a reminder of the risk to demand.

Supply-side news makes the headlines. Demand-side dynamics are often less visible.

The International Wrought Copper Council, a forum for some of the world’s largest copper users, warned at the end of May it was expecting a cumulative surplus of almost a million tonnes this year and next.

Even China may struggle to absorb such a large amount of metal, particularly if its exports of copper products remain as weak as they currently are.

The apparent strength of the country’s manufacturing indices belie a continued contraction in both export orders and employment.

Throw in copper’s seasonal demand slowdown over the northern hemisphere summer months, particularly in China, and there is a lot of present uncertainty to weigh against copper’s optimistic take on the future.

(Editing by Kirsten Donovan)

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