The belief that the world is well past the peak of novel coronavirus (Covid-19) pandemic-related infections and that economic activity can only improve from the lows seen earlier this year is having a profound impact on commodity markets. Ultra-loose monetary policies of major central bankers in terms of infusion of liquidity and low interest rate is adding to the positive sentiment.

Within the commodity complex, industrial metals enjoy a positive outlook, driven by recovery in China’s economic activity in recent months.

Copper is undoubtedly a major beneficiary even as China’s planned policy stimulus will essentially translate to massive infrastructure spending.

Investment in electricity grids would lead to higher levels of copper consumption.

It is well-recognised that the Asian major — the world’s second-largest economy — accounts for nearly 50 per cent of the global metals demand.

A swift revival of economic activity, combined with optimistic growth outlook among investors, has propelled base metals prices in general and copper prices in particular higher.

Supply concerns

Copper is also benefiting from supply uncertainties, falling inventory at the bourses and a weaker dollar. Stocks registered on LME are slowly falling to multi-year lows (currently less than 100,000 tonnes). This suggests that demand outside of China may also be turning the corner. Mine output has faced losses this year as a result of quarantine restrictions. The risk of a second wave, especially in Latin America, is causing labour shortage.

Last week, for a brief while, copper breached the $6,700-a-tonne mark – the highest in 24 months. This was driven essentially by speculative financial investors. In Q1 this year, the same metal was languishing at around $5,000/tonne, which by Q2 smartly recovered to $6,000/tonne. From early July till mid-August, the metal traded in a narrow corridor of $ 6,400-6,500 a tonne.

The World Bureau of Metal Statistics has reported that copper suffered a supply deficit of about 1,50,000 tonnes in H1 this year. At the same time, the latest data from the International Copper Study Group (ICSG) show that the global copper market was balanced in the first five months of the year. In other words, the high surplus seen at the beginning of the year stands reduced, possibly due to lockdowns in copper-producing countries.

According to ICSG, mining production decreased in April and May by about 5 per cent.

With easing of lockdown restrictions of late, production has most likely resumed. Any rebound in production is sure to impact the market sooner rather than later. CFTC (US, Commodity Futures Trading Commission) data too suggest that the copper rally to $6,700/tonne was driven to a large extent by speculative investors. No wonder, there has been a healthy correction to $6,500/t. Copper is likely to trade in the $6,500-6,600 a tonne range until a fresh trigger comes along.

Price prospects positive

Although the risk to copper market can come from renewed spread of the pandemic, looking a little further ahead, price prospects for copper appear positive. Although global growth is set to shrink in 2020, there is promise of a growth rebound in 2021. Any evidence of an effective coronavirus vaccine made available is sure to lift the market mood.

Across economies, there is promise of continued high levels of fiscal spending, under the lead of China.

For 2020, China’s copper consumption is estimated at 11.5 million tonnes, down from last year’s 12.8 million tonnes.

Importantly, consumers are beginning to build larger inventories in order to insulate themselves from possible supply-chain disruptions in future; an important lesson the pandemic has taught the world. Liquidity is sure to continue to boost commodity prices in general as we saw during the financial crisis of 2008-2010. The highly accommodative monetary policy of major central bankers is likely to continue for a longer time.

The latest developments suggest that the trade friction between the US and China is under control. China continues to buy goods from the US.

The writer is a policy commentator and a commodities market specialist

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