Copper futures rally: is there more to come?

Copper futures rallied back above $9,000 a tonne in January for the first time in six months and have since gained another $100/t as several factors have stacked in favour of the red metal.

Firstly there is the post-Covid reopening of China and the subsequent pick up in consumer demand and manufacturing. The country’s official manufacturing purchasing managers’ index (PMI) rose to 50.1 in January from 47.0 in December, indicating that manufacturing is turning the corner from contraction into expansion.

January figures can be a little lower than subsequent months because China tends to close down for a week during the Chinese New Year. The recovery, however, is not happening in a straight line. According to Caixin data, January manufacturing PMI stood at 49.2, below the key 50 line which indicates contraction.

The two numbers are not in contradiction as the indexes cover two different groups of companies, the official index reflects the activities of large state enterprises, while the Caixin data covers smaller and medium-sized businesses. The current readings indicate that the SMI sector is lagging behind larger enterprises on their way to full recovery.

Apart from the relaxation of Covid restrictions over the last few weeks the Chinese government also released a series of measures not only designed to boost the economy but also stabilise the country’s housing sector which has gone through a boom and bust over the last few years. While the government does not want to see a repetition of large property investors overleveraging their projects and failing in loan repayments there is also a recognition that the fast expansion of the property sector since the start of the century has been a huge factor in the country’s economic growth.

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Consequently, the government has started relaxing some of the strictest lending rules it had put in place over the last two years in an attempt to help the housing sector out of the current slump which occurred over some extensive lending. According to ING research, China is planning to allow some property firms to add leverage by easing borrowing caps and pushing back the grace period for meeting debt targets.

As China accounts for more than half of the total global demand for copper changes, in the country’s manufacturing sector and the potential recovery of housebuilding are already being reflected in prices.

The US economy and copper

Changes in US legislation put in place more than a year ago are also beginning to be felt in the copper market. Biden’s Infrastructure Investments and Jobs Act designated $550 billion to be spent on building bridges, roads, public transit, water and energy systems over the next four years. Of that $65 billion is being funnelled into upgrading the country’s electrical grid. In addition, as part of the Act, the US also plans on expanding its broadband network to provide all the communities with internet access.

The cumulative need for copper in wiring, the new wind and solar power generation requirements and traditional use is expected to rise tenfold between 2023 and 2035.

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