Copper prices rose to a record $10,724.5 a tonne on May 10 before dropping 6.5 per cent to $10,027.50 during the weekend but this declining trend may not last for long.

Analysts see copper ruling firm or heading up a little more during the later part of this year, particularly once the Covid-19 pandemic subsides in Europe.

On Monday, copper prices were near a month’s low after China said it will manage its commodity supply and demand to control any unreasonable increase in prices.

China has been forced to act after Chinese consumers began to complain about high prices. This has led to producers dipping into their inventories, which are being reduced now.

Declared as the “new oil”, copper has been under pressure over the last fortnight, and it became intense last week when prices dropped nearly 4.5 per cent.

Speculators cut ‘longs’

This has resulted in speculators cutting their long position in copper for the second week in running, as per Commodities Futures Trading Commission (CFTC) data. Bets on copper rising further were cut by 9,000 lots last week, leaving the net long positions at over 51,500.

There are other factors that are putting pressure on the metal, which is witnessing demand from the power, electric vehicles (EVs) and construction sectors.

According to the International Copper Study Group (ICSG), world copper mine production increased 3.5 per cent during January-February this year with the concentrate output rising five per cent.

Though production in Peru and Chile declined, it was offset by higher output in Indonesia, Congo, Mongolia, Panama and Russia.

Refined copper surplus

Refined copper production increased 2.9 per cent in the first two months but usage of refined copper was up only 1.7 per cent. This has left a surplus of 1.3 lakh tonnes (lt) of refined copper globally and if stocks in Chinese warehouses are taken into account it is 1.4 lt.

According to Chile copper agency Cochilco, demand for refined copper this year is expected to total 24.2 million tonnes (mt), up 3.4 per cent over last year. This will be mainly from countries other than China, which are expected to raise their consumption.

Mine production, at the same time, is projected to increase by two per cent to 21 mt as output recovers post-Covid-19.

According to Dutch multinational financial services ING economic and financial analysis, imports of copper concentrate by China fell 4.8 per cent year-on-year and 11.5 per cent month-on-month to 1.92 mt in April going by Chinese import data. But, imports during January-April were up 4.4 per cent year-on-year.

Bank of America, in its outlook on copper, said that current stock levels of copper are at 15-year low that can last just three weeks. Demand-supply rebalance is expected only during 2023-24 before another deficit creeps in.

Jury out on prospects

In fact, analysts are split in their view over copper with some projecting a decline in prices but some like Bank of America projecting prices to top $25,000 by 2025.

Sterlite Copper Chief Executive Officer Pankaj Kumar told BusinessLine in an email response that the supply and demand factors are driving the ongoing price trend in copper with both aspects casting their influence.

Wenyu Yao, Senior Commodities Strategist at ING, said in a note that copper prices gained this month on concerns over potentially tougher mining rules and higher taxes in Chile. The ongoing threat of potential strike action at BHP’s remote operations centre in Santiago also aided the uptrend.

Sterlite’s Kumar said that on the supply side, many copper producers continue to face challenges in operating at full potential. Being a labour-intensive industry, the Covid-19 pandemic has reduced the deployment of workers at the copper mines, thereby affecting resumption plans.

Cochilco has also acknowledged the problems that could arise out of the pandemic, especially in top producers Chile and Peru.

Chinese demand, new uses

Chinese demand with its GDP touching pre-pandemic levels and copper finding new uses in sectors such as EVs, decarbonisation and green infrastructure are helping sustain demand, Kumar said.

ING’s Yao said that medium to high-speed economic growth, with a focus on new infrastructure including the development of EVs and renewable energy, would mean solid demand growth for metals, especially copper.

UK-based business intelligence company CRU group said Chinese copper demand from EVs, and renewable power will see high growth rates. However, these are from a low base level.

“These industries will see long-term sustainable development, pushing demand higher year-on-year. We forecast that Chinese copper demand from EVs and related infrastructure will see a 26 per cent CAGR over the next decade,” it said in a note.

‘Inadvisable to predict’

The Sterlite Copper CEO, however, added that “it is inadvisable to predict price trends as copper price movements can be due to other factors beyond supply and demand”.

He acknowledged that the analysts are split in their outlook for the non-ferrous metal with some “predicting continued growth while others are being more conservative in their outlook”. However, it is too soon to speculate on specific movements, Kumar added.

CRU pointed out at two further uncertainties in forecasting the copper price trend. “One is the extent to which China can meet its copper needs from copper scrap. The other is the rate of substitution to other materials, such as aluminium, and thrifting,” it said.

Mining production

Kumar said that mining production is set to go up with the world overcoming Covid. “A number of new copper mines are also scheduled to come online within this year and beginning of next year. So, demand is likely to continue rising but prices are expected to cool off with the added supply,” he said.

Demand will come from big economies such as the US and China as they pump investments into their economies in order to boost revival. For example, US President Biden has announced a $2 trillion investment. This stimulus is bound to trigger investments in infra also, which will help sustain the demand for a continued period, he said.

Yao said that the cyclical uplift in demand continues to support underlying consumption of copper from major end users. The restocking cycle, which began at the end of the third quarter last year, by US manufacturers and wholesalers has not yet come to an end.

Pointing out to new uses of copper in the medical field, Kumar said that studies are going on to assess the possibility of using copper in major hospitals, hotels etc. because of its antimicrobial properties. “While this contribution to total demand is negligible, it is likely to increase in a post-pandemic world due to the increased awareness,” he said.

The CRU group said that EV and renewable power's share of total Chinese copper consumption will expand significantly. “We forecast that by 2030 around 12 per cent of China copper demand will come from these sectors, up from under 4 per cent currently,” it added.

Impact on India

On what the impact of the surge in copper prices could be, the Sterlite Copper CEO said that the Indian market is very price sensitive.

“If the copper price continues to rise there is bound to be a drop in demand as manufacturers opt for cheaper alternatives instead of refined copper. We may see copper scrap increasingly replacing the use of refined copper, which will affect quality standards,” he said.

Kumar said that Indian manufacturers are likely to get back into production which will propel demand once the pandemic eases. “Positive movements by the government towards EVs and renewable energy are also driving growth in demand. Post Covid, the government spending on infrastructure is also likely to increase, which will help sustain demand,” the Sterlite Copper CEO said.

“Copper is a key metal for infrastructure development in India and is a core metal, a trend borne out globally as well. Ensuring local availability instead of imports can help the continued growth.” he said.

Most large and small manufactures will have to factor into their costs a rise in working capital, to accommodate the rise in copper import prices. While large companies may somehow weather this rise, it will prove difficult for smaller businesses, he said.

“High working capital costs can be a concern for domestic industries if India continues to rely on imports for production,” Kumar added.

Related Topics
comment COMMENT NOW