Let Copper Rise, But Not So Fast

Copper is gracing the heights at which it opened 2020. After dropping to US$4,617/ton on the London Metal Exchange in March, the red metal is currently trading at US$6,080/ton. That is a 31.69 percent rise in just three months, amid what is often described as the worst crisis since the Great Depression. While some analysts argue that copper still has room for further gains, others caution that its price may fall once supply issues abate.

A recent Investing Cube article lists the following four reasons in support of an even higher copper price in the short-term. First, demand is rising due to the manufacturing recovery in China. Moreover, infrastructure stimuli in the US, EU and China are bracing demand up. Second, COVID-19 keeps pressuring producers in key countries like Chile, Peru and DRC. Third, copper shorts are falling, as “more traders have started being bullish on copper.” Fourth, copper price technical analysis is supportive of a higher price.

With respect to copper demand, Reuters highlights that China’s industrial activity grew at its fastest level in June since December 2019. The Asian giant is the world’s top copper consumer, so an upsurge in demand there immediately impacts prices. On the supply side, Zacks explains that purchasers are concerned about Chile’s deteriorating COVID-19 situation. Authorities in the world’s top copper producer are tightening restrictions at mines. Chile's government projected a decline of 3.5 percent in the country's copper output relative to 2019, Zacks reported.

However, it is likely that these demand and supply factors will be insufficient for bolstering copper in the long run. “It all looks like a re-run of the financial crisis a decade ago when China came to the rescue of metals’ demand with a combination of massive stimuli and inventory build,” Andy Home points out in his Reuters column. This time, though, not even China may be able to make up for sluggish global growth. “The International Wrought Copper Council sees the global copper market surplus to reach 285,000 tons this year as a result of demand destruction, with the overhang rising to 675,000 tons in 2021,” reports Cogencis.com.

It is true that supply disruption, industrial recovery in China and intensification of demand from low carbon technologies form a strong case for copper. But recent spikes in the metal’s prices may only be “the outcome of too much liquidity pumped into the money market by governments all over the world as monetary policy response to COVID-19 induced recession risk,” Cogencis.com cautions. For copper’s price to actually be buoyed up by fundamentals, the COVID-19 chaos still has to subside.