Nicole WillingThe copper price had been expected to rally in 2020 after the US and China called a truce to their trade war with a “phase one” deal and China was set to ramp up its infrastructure spending.
However, the Covid-19 pandemic has disrupted the upward trajectory of the market, and the copper outlook for the rest of the year now depends on the rate of China’s industrial recovery.
The copper market is largely driven by demand from the construction and automotive industries, and as such is closely tied to broader macroeconomic trends. With the world’s largest economies entering a recession in 2020 and the crude oil market seeing a historic collapse in prices, investors are asking: “When will copper prices rise?”
What is the future of copper prices? And is now the time to take a position in the market based on the copper price forecast? This article offers an overview of the recent performance of the metal with the copper price going down, and recaps analysts’ copper price predictions to help investors make their trading decisions.
Covid-19 disrupts copper demand and supply balance
The spot copper price on the London Metal Exchange (LME) rose by 14 per cent in 2019, as the market rebounded from a two-year low in October with concerns about the impact on demand of the US-China trade war beginning to recede.
The price peaked in January 2020 at an eight-month high, then plunged by almost 27 per cent to a three-year low in March, following the trajectory of the financial markets, as investors weighed the effect of the sharp drop in consumption during Covid-19 lockdowns. The subsequent rebound in the equity markets and disruptions to mine supply prompted a copper price increase in April, but the potential for further upside will depend on the rebound in industrial activity in the coming months, particularly in China.
Around 50 per cent of global copper consumption takes place in China, where GDP shrank by 6.8 per cent during the first quarter – its first contraction since 1976. With the spread of the coronavirus pandemic playing out in China before spreading across Europe and the US, factories began reopening in the Asian nation first, providing some support to prices.
The Caixin Manufacturing Purchasing Managers’ Index (PMI) survey for April showed that “Chinese manufacturers signalled a back-to-back monthly rise in production after a record decline in February, as more firms reopened and were able to increase capacity”. Meanwhile, trade data showed that China’s imports of copper rose in April.
However, disruptions to the supply chain in Europe and the US as Covid-19 lockdowns extended into April and May prevented copper consumption in Asia from rebounding more strongly. The IHS Markit Global Copper Users’ PMI fell from 48.9 in March to 43.1 in April, the lowest recorded since March 2009.
“Regional data for Asia intriguingly showed a sharp decline in new orders, despite a softer downturn in March as countries emerged from their Covid-19 infection peaks,” said IHS Markit economist David Owen. “Anecdotal evidence widely attributed this to much weaker exports from Europe and the US, showcasing the reliance of the Asian copper-using industry on foreign orders. Thus, it will likely be difficult for Asian business to lead the way out of the recession when key industrial regions remain under lockdown rules.”
So far this year, inventories of refined copper on the major global exchanges (LME, Comex and Shanghai) have risen by 60.8 per cent, data from the Chilean Copper Commission (Cochilco) shows.
Although copper demand has fallen sharply so far in 2020, government-ordered lockdowns to tackle the spread of the deadly virus have disrupted supply, limiting the market surplus. Copper mining has ground to a halt in Peru, which accounts for around 12 per cent of global production according to the International Energy Agency (IEA).
Mexican production has also been affected. In Chile, the world’s largest copper-producing country, miners have maintained output despite the pandemic, but the recent copper price fall is putting pressure on smaller producers. Aside from the pandemic, Chile has been facing civil unrest, and production is vulnerable to disruption from labour disputes.
Copper price forecast 2020: will Chinese rebounding demand drive the market higher?
Are copper prices expected to rise in the remainder of 2020? The copper market had been expected to be in a supply deficit this year that would lift prices, but the drop in demand during the coronavirus pandemic is now set to leave a small surplus. Over the longer term, Chilean producer Codelco expects a five million-ton shortfall in supply in the coming years that will not be met by the few projects that are scheduled to start operations, and would be bullish for the copper price future trend.
Codelco predicts demand for refined copper to rise at a 2.3 per cent compound annual growth rate (CAGR) to 2028, while production is set to fall by 0.3 per cent during the same period unless new capacity comes into operation. The copper content in the ore being extracted from ageing mines has been falling in recent years, a trend that will only continue over the long term – potentially driving a copper price recovery.
Do copper price expectations suggest the metal is a safe investment today? The base metal is one of the ways to take a position on global economic activity. The world’s largest copper consumer, China is expected to drive a copper price increase with its plans to invest heavily in infrastructure. And global demand for copper is expected to continue to grow with the rise in production of electric vehicles and renewable energy equipment, which require far more copper wiring than fossil fuel-based systems. It is difficult to substitute copper with other metals because of its high electrical conductivity.
Chinese government approvals for infrastructure projects so far this year continue to lag behind 2019 levels, “suggesting Chinese infrastructure demand has not yet been the driving force behind base metal demand”, TD Securities said in their copper price analysis.
They continued: “We remain cautious as commodity demand could resume its downward trajectory in this macroeconomic environment and ultimately drag the complex lower before we see whether the scale of the infrastructure demand can offset the slump in export demand. For now, downside momentum signals remain firmly entrenched.”
The Commitment of Traders reports in early May showed speculators increasing their net short positions in copper, as “the recovery in metal prices remains contingent on the demand outlook, which remains highly uncertain”, the TD analysts added.
Considering the decline in Chinese demand that will not be offset elsewhere in the world, commodity strategists at ANZ expect global copper consumption to drop by nearly 3.5 per cent from 2019 to below 23 million tons in 2020. They stated: “The pandemic’s spread outside China and a slow restart of industrial activities inside China will subdue demand for industrial metals in Q2 2020, while rising mine disruptions could be an offsetting factor.
“We believe production cost is a reasonable guide to the price floor, but this is falling due to lower oil prices.”
Copper prices have never traded below the 90th percentile of production costs, the ANZ analysts noted, so their copper price forecast sees the downside protected near $4,000/t, with expected copper prices averaging $4,930/t in 2020 before rebounding to $6,040/t in 2021. The LME copper cash price averaged around $5,100/t in the first week of May.
The bottom line
So, should you invest in this metal today? Based on the latest fluctuations in the copper price in the commodity market, it remains a quite risky asset. Just like with any other investment tool, opening a position in copper is no guarantee of success. However, this base metal can be a great addition to your diversified investment portfolio.
There are a number of ways you can invest in copper. One of them is through the contracts for difference, or CFDs. To learn more about copper CFD trading, check out the free online guide provided by Capital.com.
Trade Copper Spot CFD
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