Copper has been through a short, and bumpy ride since we last visited it properly in February. At the time we already saw the price under pressure from COVID-19. China was already in lockdown with the commensurate impact on heavy industry in the country. We thought the price drop was overblown.
At the time, we were cautious, saying:
“We don’t know what is in store for the coronavirus, or indeed the Chinese economy as a result of the outbreak, and we may not fully understand the scale of the problem for weeks to come.”
Copper at that stage was already trading at its lowest point since 2016. We already felt it was cheap, given anticipated future industrial activity, especially the construction of the infrastructure needed to power cleaner energy.
The copper bounce
In the first half of February copper was trading around $2.55. Uncertainty about its strength in the face of the virus proved prescient, however, as the price plunged to a low of just under $2.00. The copper price has since surged back again and is now chasing $3.00. That’s a 50% gain since the middle of March. It has come off a low we haven’t seen since 2009.
Traders have been cautious about re-entering the copper market as they consider the economic impact of the COVID-19 pandemic.
Some of the core fundamentals underpinning the price seem to be creeping back into place. China’s unwrought copper imports (e.g. anodes and cathodes) rose 50% in June. This is 15% above any previous monthly record. June cargoes were up x2 on the same import levels seen in June 2019. China accounts for half the world’s copper consumption and is very much in the driving seat with this commodity.
Hedge funds returning to long copper positions
Data from the Commodity Futures Trading Commission has shown that hedge funds are now taking more aggressive positions in the copper futures market. Long bets are now sitting at levels not seen since the end of last year. It looks as if the big 2020 copper trade is coming back to life and getting off the rack.
There has been very little formal research put out on the copper market in the last few months – we suspect analysts, who were bullish in January, were caught on the hop by the sheer impact of the virus on global commodity markets. They are also cautious about a second wave, and what that would do, hence nobody is keen to come up with a strong call publicly.
China still needs copper
But much of what they were saying at the start of the year still holds true: China still needs copper and, as BMO Capital Markets pointed out, Europe and Asia have been de-stocking aggressively over 2H 2019. The tight supply situation was masked by the US-China trade tensions at the time. Ongoing rumbling between Beijing and Washington DC will still worry some copper investors, but at the same time existing stockpiles are being consumed again.
We anticipate that the process of running down existing copper stocks had slowed down over the last few months, but factory demand is now going to increase. The second wave, if it emerges, will be a factor in the copper price, but governments know their enemy now, especially in Asia, and if/when it arrives in the autumn, we expect lockdowns to be very localised, as we have already seen.
The US-China situation will be a big factor in 2H – Chinese industrial consumers could be stocking up now while the price is cheap and before any further restrictions emerge on China trade.