Commodity Analysis

Subdued demand contains copper prices

G Chandrashekhar | Updated on July 28, 2019 Published on July 28, 2019

The weak price is despite the supply problems in the market leading to deficit

Copper has been hovering around the $6,000-a-tonne mark for some time now, and has failed to decisively break above it. For a while in June, the metal was trading a tad below $5,800/tonne.

Copper is a ‘growth commodity’ given the positive correlation between economic growth and consumption of the metal. Now, with the International Monetary Fund (IMF) lowering its forecast for global economic growth as well as global trade in goods and services in 2019, and with the world’s largest consumer China distinctly slowing, copper prices are most unlikely to recover in the month ahead.

Geopolitical tensions, a strong dollar and an unending tariff war between two of the world’s largest economies — the US and China — further worsen the sentiment in the industrial metals market in general, and copper in particular. Global supply chains are undergoing changes following imposition of tariffs.

Interestingly, the weak price situation for copper is despite the well-recognised supply problems in the market leading to deficit. According to the International Copper Study Group (ICSG), the estimated supply deficit for this year is 189,000 tonnes. Chile, Zambia, Peru and India are among the producers showing high decline in output. Sterlite Industries’ copper project in Thoothukudi (Tamil Nadu) remains shut.

In the first four months itself, the deficit has reached 149,000 tonnes, causing anxiety among market participants, according to the ICSG. So, from a fundamental perspective, higher copper prices may be justified, but the sentiment at the moment is subdued because of demand conditions.

Chinese slowdown

The robust construction activity in China is expected to slowdown in the months ahead. Slowdown in factory output growth and lack of demand in user industries such as automobiles is adding to the problem. Treatment and refining charges have fallen sharply in recent months, reaching a seven-year low. Smaller smelters in China have already cut back production following a fall in TC/RCs (treatment/refining charges) to uneconomic levels because of a tight copper concentrate market.

Chinese trade data for June point to a sharp fall in import of copper, copper ore and concentrate.

It is apparent that Chinese consumers have opted to utilise domestic stocks as evidenced by the fall in Shanghai Exchange stocks.

In the months ahead, the US is predicted to slowdown markedly as the positive effects of the stimulus fade.

A widely expected rate reduction by the US Federal Reserve in response to slowing growth momentum may weaken the dollar for some time, but other central banks are likely to counter it with more accommodative monetary policies.

Subdued economic growth outlook for the rest of 2019 is expected to weigh on prices of industrial metals.

Any escalation in the ongoing US-China trade friction will have a negative implication for the market. An American delegation is scheduled to reach China by the end of July to resume negotiations, but many believe no significant breakthrough is likely.

Copper will be no exception to the challenges confronting all the industrial metals. But looking at the market fundamentals, the metal may prove to be more resilient than its counterparts because of lower mine output and supply deficit.

An additional factor will be China’s recent tightening of restrictions on scrap imports. This is likely to boost demand for refined copper.

However, 2020 may be a different story for copper. Lack of expansion of existing mines and limited number of new mines opening, constraining supplies, would lend support to prices in an environment where there is likely to be a coordinated action among central banks around the world to revive growth.

The writer is a policy commentator and a commodities market specialist

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Published on July 28, 2019
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