Economic bellwether – Doctor copper to ride high

LME Copper prices are up by 38% since April this year, thanks to recent supply side disruption on the mining side, falling LME stocks and declining TC/RC rates. However, these factors have not deciphered into any sizable decline in global refined output. WBMS numbers convey that global mine output grew by 0.68% y/y during the first six months of this year, while refined output has expanded by 5.5% respectively. Apparently, ICSG estimates global refined market to be balanced during the first five months of the year, as lower output growth was counterbalanced by fall in global demand. In fact, CRU expects the global market to be in a surplus in 2020.

On mining developments, Peruvian copper production has almost regained lost ground from the pandemic-induced shocks, while Chilean Codelco’s copper output during Jan-July is 2.3% higher than last year. This comes even though mine operations were impacted by rising COVID infections. Production at world’s largest copper mine Escondida during July rose 3.8% y/y. All these clearly mitigate supply side concerns to an extent and as a result, we should TC/RC rates rebounding from the lows.

Nevertheless, Copper prices continue to ride higher as the Chinese economic recovery has been stronger than feared at the beginning of the COVID crisis. China’s GDP is projected to grow this year, the only major economy that will do so if the forecasts turn correct. On Chinese refined copper demand, consumption has grown by 15% y/y (WBMS estimate) during the first half of this year, propelled by spurt in offtake for electricity and traction in property markets. Moreover, scrap shortage in China has raised import demand for both concentrates and cathodes. In this regard, refined copper imports during Jan-July period this year were up by 34.5% y/y. Falling LME inventories have also been supportive for Copper prices, which are down by 23% on YTD basis and at 15yr low. However, the drawdown in LME stockpiles has been counterbalanced by 43% rise in inventories at SHFE warehouses.

On price outlook, although comfortable refined situation and recovering mine output makes us cautious on the elevated LME Copper levels, we suspect that copper’s bullish bias will remain intact given the economic recovery in world’s largest metals consuming nation China. Economic activity in China returned pretty much to normal, manifested by rising supply and demand side of the equation. As a case in point, Industrial output is persistently growing at an average rate of 4.7% (y/y) since April, while retail sales during August were back in black, registering its first growth this year. Automobile sales have also been steady, growing consecutively for four months. Rebounding consumer spending can also be seen by the recovery in Chinese domestic air travel and the fact that holiday bookings for next month are pretty much sold out. A weaker US dollar and accommodative global fiscal and monetary policies will also remain supportive for the red metal. We see prices trading in the range of US$$6,600-$7,100/ton during the next 3 months. Having said that, the risks to our call can emanate from the uncertainty over US Presidential elections and peril of an intensified second wave of COVID across the globe.