Copper’s raging bull needs more than China

Copper has been on a steady upward trend, charging into a bull market and toward $6,000 per metric ton. That’s going to be tough to sustain. China’s stimulus efforts are being felt most strongly in infrastructure and construction. They have been less marked in other metal-intensive corners of the market: consumer goods and exports, which are still waiting for Europe and the U.S. to rally. 

Meanwhile, disruptions to supply from Latin America’s unfolding coronavirus disaster haven’t been enough yet to offset annualized demand loss. What happens next will be determined by whether Chile, Peru and producers like Indonesia, home to the world’s second-largest copper mine, can do better at controlling the epidemic than resource-rich Brazil.

An economic bellwether, copper crumpled earlier this year as the scale of the pandemic became clear, falling by late March to its lowest levels since late 2016. The metal has clawed most of that back and with no large market surpluses in sight, Goldman Sachs Group Inc. is among brokers that have raised price forecasts. The comeback has been largely driven by China, which consumes half the world’s copper and has been steadily eating through stockpiles as industrial production restarts and building resumes. There’s plenty of encouraging evidence: Inventories, after soaring when the pandemic began, have tumbled back. Cancelled warrants, which represent metal earmarked for delivery and so suggest appetite for the physical commodity, have shot up since late May. 

Hiccups in mine activity are lending support. Shipments from Peru, which has seen perhaps the longest lockdown among top producers, are down by almost a fifth so far this year, according to UBS Group AG. Add in Covid- and price-related closures, project slowdowns and cuts to spending budgets, and the combination is telegraphing tight supply. Enthusiasm is visible among previously bearish money managers, who are turning bullish and adding to long positions.

Is all of that enough to keep copper running high? Not necessarily. While consultancy Wood Mackenzie Ltd. estimates 2020 refined production will be down more than 1%, it expects refined consumption to contract by over 3%. 

The shape of China’s stimulus and recovery offers one reason for caution, as the effects of pent-up demand begin to fade. Take grid spending, usually a major driver of copper demand: After a contraction at the start of the year, investment has increased and the budget is expected to expand from a year earlier. Yet the emphasis is on ultra-high voltage electricity lines to cover long distances, which tend to use lighter aluminum. Production of consumer appliances like air conditioners is also still under pressure. Though better property and auto sales figures are encouraging, there was no significant real estate stimulus out of the recent National People’s Congress meeting. And measures to support the electric vehicle sector and its charging infrastructure may not be enough.

More worrying is the weakness in the China’s exports, as seen in the May manufacturing purchasing managers’ index. About 30% of China’s apparent consumption of refined copper is actually exported, according to Cru Group, so extended lockdowns in India and elsewhere matter.

It would be foolish to  underestimate China’s ability to throw money at the problem. Still, the bigger unknown for the coming weeks is how the coronavirus spreads in copper’s biggest producers. Peru has already seen exports drop but so far Chile, which accounts for about a third of global production, has continued to operate largely unscathed. That was easier when there were fewer cases in the wider population, but now the country is in the grip of a significant outbreak.

Brazil, now with the second-highest case number in the world after the U.S., offers a cautionary tale. With case rates rising at and near mines, iron ore producer Vale SA has already been forced to suspend work at one complex, Itabira, and concerns are growing about the country’s north. Near its Carajas operations there, the local town of Parauapebas has 5,734 cases for a population of roughly 200,000.

Indonesia is another worry, says Nick Pickens, copper research director at Wood Mackenzie, given the importance of the Freeport-McMoRan Inc.-operated Grasberg mine to additional supply into 2021. Reuters reported last month that the mine was now working with a skeletal team after a rise in coronavirus infections in the area, including in workers’ living quarters. 

That would add uncertainty further out, not least given the degree to which miners have cut capital expenditure, discretionary spending and care and maintenance, as Cru principal analyst Craig Lang points out. That leaves them less prepared if something goes wrong, and increases the risk of disruption. For now, though, it may take more to feed the bull run.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.