While the prices of almost all base metals have shown a rising tendency, copper surged by over $300 a tonne in the last four weeks to a recent new high of $6,880/t on Monday, thanks to incipient signs that the global economy under the lead of China is coming out of the long shadow of the Covid-19 pandemic.

Providing tailwind to the price performance was the slight depreciation in the US dollar.

Industrial production in China has shown a robust growth in August. It is well known fact that the Asian major is the world’s largest importer and consumer of many base metals. Strong infrastructure spending in China is seen a positive for copper and any further ramp-up of construction activity is sure to boost demand for the red metal.

This comes amidst the backdrop of tightening supplies. Corona-related mine closures in Peru have contributed to production outages to the extent of 20 per cent in the first half of the year.

According to the International Copper Study Group (ICSG), global copper market showed a deficit of 192,000 tonnes in June, far higher than the 36,000-tonne deficit in May.

In the first six months of 2020, the deficit has aggregated to 235,000 tonnes, albeit smaller than last year’s 300,000 tonnes in the corresponding period of last year, ICSG has observed. World Bureau of Metals Statistics has estimated that copper was in deficit to the tune of 229,000 tonnes till July this year.

From a trade point of view, China’s refined copper imports this year are projected at 3.8 million tonnes — around six per cent more than last year. Tight availability of scrap and environmental concerns over recycling are also seen driving import of refined copper.

Amidst general tightness in supplies, LME copper stocks have fallen to multi-year lows. This has pushed the market into backwardation — that is spot price is higher than forward rates. There is a belief that investors may have played a part in the price upswing. CFTC data suggest net long positions in copper have climbed to a two-year high.

Although China’s imports may have risen sharply, the actual consumption in the country may not have risen as sharply as imports, many observers believe. In other words, China may be building inventory.

At the same time, global copper production has begun to recover of late. In the event, any hope of a large increase in price from the current levels may be somewhat misplaced. Even the current rise may not be sustainable and correction should come as no surprise. The role of financial investors is sure to exaggerate the price impact.

The author is a policy commentator and commodities market specialist. Views are personal.

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