Commodity Analysis

China’s demand for copper turns red-hot

Mark Burton and Libby Cherry | Updated on September 06, 2020 Published on September 06, 2020

The global copper market could be on the cusp of a historic supply squeeze as Chinese demand runs red hot and exchange inventories plunge to their lowest levels in more than a decade. A growing chorus of traders and analysts say those dwindling spot reserves could trigger a further surge in prices, building on a rally that lifted copper this week to two-year highs above $6,800 a tonne.

High demand from China

The 24 million tonne-per-year copper market has experienced bouts of tightness ever since the early days of China’s industrial expansion, but that country’s rampant appetite after emerging from coronavirus lockdown could usher in a period of chronic under-supply.

Current conditions could push prices to $7,500 a tonne, he said. Citigroup analysts are more bullish, advising clients that a price of $8,000 is plausible if global stockpiles drop to near the levels seen in 2011, when copper reached a record $10,190 a tonne.

Evidence of a looming supply squeeze is mounting on the London Metal Exchange (LME), where inventories are at their lowest levels in almost 15 years -- only enough to last users a little more than a day.

LME data shows there were about 120,000 tonnes of copper stored privately in Europe at the end of June, but none has materialised on the exchange, even with the region’s lacklustre economic recovery. At the same time, LMEs Asian depots are virtually empty.

Inventories may swell

With investment in copper-intensive sectors such as renewable energy and electric vehicles set to swell as countries start rebuilding their economies, manufacturers in previously weak markets like Europe also may look to boost inventories, thus creating an extra pull on spot supplies.

Still, rising production may relieve some of the strain. There are signs scrap dealers are offloading inventories to cash in on higher prices, and smelters in China are producing at an elevated rate, even as constrained supplies wilt processing margins. Mine production in South America also is starting to recover.

Copper and other exchange-traded commodities have a built-in relief valve whenever inventories run low. Increased demand quickly drives up the value of spot contracts relative to futures, encouraging stockholders to sell excess inventories.

Bloomberg

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Published on September 06, 2020
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