Join our daily newsletter At The Bell to receive exclusive market insights
In a challenging market environment, copper finds itself in limbo as investors eagerly await China’s Politburo meeting next week, where much-anticipated economic stimulus could be announced
On Friday, the price of copper rose sharply after China unveiled measures aimed at boosting consumption, particularly in the automobile and consumer electronics sectors.
Morgan Stanley analysts are expecting the red metal to be well-supported in Q3.
Strong demand and market support
China has witnessed increased spending in the automobile and electronics sectors, leading to higher demand for copper in the country due to its widespread use in both industries.
Despite some uncertainties, China’s copper industry continues to display resilience, with refined production, net imports, and a change in inventory reaching 1.44 million tonnes in June, marking a 12 per cent year-on-year increase.
The ‘green’ metal is expected to stay well supported in Q3, supported by micro indicators showing robust growth in wind investment and electric vehicle output.
However, other drivers of copper demand, specifically China’s massive real estate sector, are still struggling.
Production disruptions and mixed market signals have led analysts to forecast lower copper prices towards the year’s end.
That being said, copper’s long-term prospects appear promising, with several brownfield expansions and mine life extensions in progress.
Some companies have already gained approval for projects to meet increasing demand and ensure a steady supply. The factors outlined above are currently influencing copper trade dynamics, which will warrant close attention from investors.
Supply worries and trade restrictions
The copper market is sending mixed signals, with London Metal Exchange (LME) copper prices for future delivery higher than the current spot price, while Shanghai Futures Exchange (SHFE) copper prices for future delivery have been deemed lower than the spot price.
Importing refined copper into China does face extra restrictions, which has led to a 12 per cent drop in imports this year. As a result, certain regions are experiencing softer spreads in the copper market.
Amid signs of a tightening market, the scrap discount to copper prices remains low, suggesting limited availability of copper scrap in the market relative to the demand for refined copper.
China’s copper scrap imports have risen by 10 per cent year-to-date, but the potential relaxation of import standards in December could indicate a weaker domestic supply situation.
Production disruptions have added to market uncertainty, and while Q2 saw fewer disruptions compared to Q1, the measured output from major copper-producing countries like Chile is down 4.5 per cent year-to-date.
Companies such as Antofagasta and BHP have experienced production misses, while Freeport has faced export limitations in Indonesia. Although, production growth is expected from countries like Peru and Chile, where mining projects are ramping up.
Investors will need to closely monitor the outcome of the China Politburo meeting and other market developments to make informed decisions regarding all future copper investments.
