Commodity Analysis

Covid-19 to cap copper prices

Akhil Nallamuthu | Updated on March 29, 2020 Published on March 29, 2020

As global inventories are overflowing, prices crashed by 22 per cent in LME this year

‘Dr Copper’, as the analysts call it, is a leading indicator of the economic health.

Therefore, the recent rout in copper price gives us a fair idea of the bleak expectations regarding the global economy.

Copper has been the weakest base metal so far this year, losing 22 per cent since the beginning of the year. On Friday, it was quoting $4,774 per tonne in the London Metal Exchange (LME).

It has lost about 14 per cent in March alone.

The metal’s price, which was quoting at over $7,200 in LME in early 2018, lost about 17 per cent that year as the US and China began the trade war. In the same year, the dollar rallied, weighing on the commodity’s price.

In 2019, copper saw its price go up by 3.4 per cent on the back of serious supply-side constraints.

Output contracts

According to a report released by the International Copper Studies Group (ICSG) last week, the mine production in 2019 contracted by 0.7 per cent to 20.4 million tonnes (MT), following a 1 per cent production decline in Chile (the largest producer) due to lower ore grades and some production disruptions.

Moreover, there was a significant 45 per cent temporary output decline in Indonesia as two major copper mines were transitioning to new ore zones.

The dip in overall production was despite an increase in mining output in Peru, China and the US, major copper producers.

Refined copper production contracted in 2019 due to temporary smelter shutdowns in Japan, Chile and Zambia.

The output dropped 0.6 per cent to 23.9 MT despite output growth in China, the largest producer of refined copper.

In its October 2019 report, the ICSG had projected the mine production in 2020 to go up by 2 per cent on the back of expected ramp-up of activities in Indonesia and Africa. It also projected refined production to increase by 4 per cent based on capacity addition by China and a return to full capacity of smelters in other regions that were temporarily shut.

Refined copper usage

For its physical and chemical properties, copper has a wide range of industrial applications.

Electrical, electronics, building and infrastructure sectors are big consumers of the metal.

These sectors account for about three-fourth of the total consumption. Copper plays important roles in electric vehicles (EVs) and renewable energy as well.

In 2019, the use of refined copper went down by 0.8 per cent to 24.3 MT , as per the data published by ICSG. This was due to slower- than-expected demand growth in China and substantial drop in demand from the European region. Notably, the global demand, excluding China, fell by 3 per cent. For 2020, ICSG had expected the global demand to grow by 1.7 per cent.


Had there not been a supply chain distortion due to the Covid-19 contagion, the production might have gone up as per ICSG’s expectation, weighing on the metal’s price. Nonetheless, the rapid spread of coronavirus in China resulted in a drastic drop in demand (China consumes about half of the global production). As a result, global inventories have doubled, and the price crashed by 22 per cent in LME year-to-date. Bloomberg data show that global inventories shot up from 0.31 MT (as on December 31, 2019) to 0.62 MT (as on Mar 27, 2020) — the highest level since August 2018.

The situation could ease when China gradually returns to normalcy. The industrial production in March is expected to have expanded by 1.5 per cent after contracting by 13.5 per cent a month ago. On the other hand, manufacturing PMI, after plummeting to an all-time low of 35.7 a month ago, is expected to be at 46. This still denotes contraction.

But the demand revival in China will be mitigated by the sharp slowdown in Asia, Europe and the US. The International Monetary Fund (IMF) has warned of global recession.

Asia (ex-China) and the European region contribute about 35 per cent of the global demand.

While it was the demand that distorted the price, large mining nations’ decisions to cut back operations as a measure to control and prevent the viral pandemic can result in supply constraint.

Chile and Peru, the two largest miners whose combined output is nearly half of the world mine production, have already closed their borders. This can substantially bring down refined copper output as well.

Though the supply crunch may put a momentary floor on the price, sustainable recovery largely relies on the improvement in demand. Kristalina Georgieva, Managing Director, IMF, on Friday said the global economy has entered a recession. According to her, a recovery can be expected in 2021 provided the coronavirus pandemic is successfully arrested. Among several other problems, she also mentioned a possible “price shock” for commodity exporters due to reduced global demand.

And not to forget, the US-China trade negotiations could come back into picture, once the pandemic impact abates. Until certainty emerges on these fronts, the price of the red metal could largely stay below $5,500 a tonne for the year.

India scenario

India, with 2 per cent of global copper reserves and 0.2 per cent of the global production, will not impact the global price trend.

As per data from CARE Ratings, the domestic refined copper output fell by 46 per cent in 2019 to 0.46 MT because of the shutdown of a refinery in Thoothukudi in Tamil Nadu. Its closure resulted in India becoming a net importer of copper cathodes after 18 years. Copper ore imports dropped by 44 per cent.

For FY20 until July, the production and consumption grew by 1.7 per cent and 25.3 per cent, respectively. The global supply chain disruption due to the Covid-19 pandemic and India’s reliance on imports can heavily impact the local copper industry. However, domestic prices might see less downside than global prices as the rupee is depreciating.

Published on March 29, 2020

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