The last thing that copper could have wished for is the problems the Chinese real estate firm Evergrande Group is facing. The group’s chairman Xu Jiayin has been detained on charges of crime and the suspicion is that the company will find it difficult to recover.
The Chinese construction sector is a key consumer of copper and the Evergrande troubles are only likely to further affect the industry and, in turn, the demand for copper.
Copper prices are currently down to a four-month low and the metal that was one expected to stay firm over $10,000 a tonne at the start of 2023 is struggling to hold ground around $8,000.
During the weekend, the red metal’s three-month futures on the London Metal Exchange (LME) closed at $8,270.50 a tonne, while spot prices were quoted at $8,230. Analysts say consistent pressure from a strengthening dollar and weak global economy have kept copper on leash.
ING Think, the financial and economic analysis wing of Dutch multinational financial services firm ING, said China’s recovery is still uncertain, with anything related to real estate continuing to struggle. “For copper, risks remain to the downside heading into the year’s end on China’s uncertain outlook for the property sector. We believe commodity-intensive stimulus is needed to support short to medium-term demand growth,” it said.
“Despite momentary rebounds in industrial growth and new loans in top consumer China, renewed concerns over the financial health of property developers maintained worries that the country’s precarious macroeconomic backdrop has yet to bottom,” said the Trading Economics website.
“Prices have averaged $8,628/tonne in the year-to-date as of September 19, lower than the average of $8,788 seen in full year 2022, on the back of subdued global demand,” said research agency BMI, a Fitch Solutions unit.
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“Copper stocks held on the LME have more than doubled in the space of two months. This shows clear signals of weakening demand,” said ING Think.
50% inventory rise
Inventories of the red metal on the LME are 1,62,900 tonnes. The inventories increased over 50 per cent in September, following a similar rise in August, ING Think said. However, it maintains its price forecast at an average $8,582/tonne in 2023.
“We are revising down our 2023 average annual copper price forecast to $8,550/tonne from $8,800 previously as US dollar strength and market fears of another US Fed rate hike places a cap on price growth,” BMI said.
China’s service-led recovery, along with weak global demand continue to pressure prices along with investor sentiment towards industrial metals, including copper, it said.
Trading Economics said the US Fed’s hawkish outlook and concerns over Europe are affecting industrial activities “as evidenced by months of contractionary manufacturing PMIs”.
BMI said considering China, it holds the view that demand will remain weak in the short term. “Economic recovery remained uneven in August, as the country’s manufacturing PMI remains in contraction despite rising slightly from 49.3 in July to 49.7 in August 2023,” the research agency said.
China’s non-manufacturing sector, on the other hand, continued to expand despite the PMI dropping slightly to 51 in August from 51.5 in July, signaling a slower recovery m-o-m. “A contraction in the commodity-intensive manufacturing sector bodes poorly for the demand and prices of industrial metals including copper,” BMI said.
ING Think said indications are that supply of the available material will be ample. “The discount for near-term delivery versus the three-month contract continues to rise, which signals more deliveries might be on the way,” it said. The discounts are the widest in 29 years.
“With rising LME inventories and discounts, more weakness may lie ahead for copper prices,” it said.
BMI forecast a supply surplus of 236,500 tonnes in 2023 as overall global copper demand is expected to trail. China’s copper production is predicted to rise by 7 per cent year-on-year y in 2023 to 11.6 million tonnes.
The research agency said though it expects prices to improve slightly from current levels in 2023, it does not expect a return to the highs seen in 2022 as China’s real estate sector remains in doldrums.
“In the longer term, we expect the copper market to be in a sustained deficit as the green transition accelerates along with the demand for ‘green’ metals including copper,” it said.
Market players are flagging large incoming copper deficits, with current production levels failing to keep up with increasing demand for electrification. Output from Chilean state-owned Codelco sank by 14 per cent in the first half of the year, stretching the 7 per cent decline from 2022, Trading Economics said.
BMI said in the longer term, it expects the copper market to remain in deficit as the green transition accelerates along with the demand for ‘green’ metals including copper. “In 2024, we expect prices to average $8,800, above the 2023 average as the dollar weakens and demand outpaces supply,” the research agency said.