Copper market, can we talk about global growth?

Answering this question in a nutshell is not entirely straightforward. In fact, to do so one has to analyse what has happened not only in recent weeks, but also in recent months. The past few weeks have shown positive signs, with the price of copper surpassing $3.8 per pound, a record high since the beginning of September. This can be considered an optimistic sign, as the metal's performance is often used as a barometer of global industrial activity. However, it is not all 'copper' that glitters. Despite this positive figure, a deeper analysis of the previous weeks' rise suggests that it may reflect a regional phenomenon rather than an organic and real strengthening of demand globally.

The strategic value of copper is not often emphasised, especially considering its cruciality for the energy transition and its extensive application in most existing electronic equipment. To substantiate this statement, as usual, it is useful to analyse some numbers. For example, take an electric vehicle, which on average requires about 55 kg of copper compared to the 22 kg required by a combustion engine, for the generation of renewable energy, such as solar and wind power. The demand is even five times higher than for traditional generation methods. Many countries, most notably China, which consumes more than 50% of global copper, are looking to expand their mining portfolios to meet the impending demand (Editor's note: China is about to double its solar capacity five years ahead of its 2030 targets, and solar panel exports to Europe almost doubled last year). Other recent news is the purchase by MMG Ltd., a subsidiary of the state-owned China Minmetals Corp., of the Khoemacau mine in Botswana, one of the densest mining spots for high-grade metal in Africa, covering more than 4000 square kilometres. At the same time, there are widespread problems on the supply side, both because of the deteriorating quality of the mined material and the decade of under-investment in the sector due to the various strikes that are affecting mining nerve centres, particularly in South America. MMG itself, therefore, has been facing a strike at the Las Bambas mine in Peru since 28 November, even though the clashes had already started in 2016, one of the world's largest deposits producing around 2% of copper globally. Another example is Canada-based metallurgical company First Quantum, which is at the centre of a political dispute over the resumption of mining operations in Panama. Cortiz, President of Panama, had announced a referendum on the mine, but the vote was put on hold pending a Supreme Court ruling. As a result, the company will cut production at Cobre Panama, a mine that represents about 300 kt, about 1.5% of global supply. This set of events is not good and threatens the long-term stability of the quantities put on the market and raises uncertainty about the stability of supply for smelters, as pointed out by many giants of the Chinese copper industry, given also the exponential increase in demand expected in the years to come. China, after increasing its smelter capacity by expanding and bringing smelters back online for upgrading/maintenance, is looking to increase its capacity to receive the metal, both through acquisitions but also by relaxing tariff measures, such as the one on Australian coal and copper imports that were imposed in 2020. In fact, China was recently helped by Trafigura's Chinese branch to clear a 10k tonne consignment of copper, a move that marked the end of trade tensions between the two countries.

The recent metal price movement seems to have a regional character and was mainly dictated by three factors. Firstly, the positivity generated by the announcement of a stimulus plan for the property sector by the People's Bank of China. amounting to some USD 137 billion, which will try to keep afloat an industry that has been in dire straits for years and is one of the largest users of the metal. Secondly, by the record low levels of inventories on the Shanghai Futures Exchange, which recorded the lowest levels of stocks since 2009. Finally, the third factor is a generally weaker dollar. Another factor to consider is the period in which this rise occurred, coinciding with the seasonal re-stocking activities of northern smelters. A confirmation of an actual strengthening of the market could be found in the reduction of processing margins, as smelters with an appreciating market would be able to sell cathodes at a higher price in the future. However, this dynamic is currently absent in the market. In the rest of the world, demand for the metal remains rather sluggish, especially in Europe. Stock levels at the London Metal Exchange are at record highs, reflecting the uncertain momentum in the old continent despite the green and Next Gen EU push, which could revive economic activity. It remains to be seen whether the contango seen in recent weeks also takes into account that any reduction in activity in the Chinese real estate sector could release large amounts of copper into the markets.