Copper soared on synchronized China and global stimulus boost

·         Growing EV and RE adoption on both sides of the Atlantic-as-well-as Pacific (US-Europe-China) and infra boost in China and India boosting Copper

·         China’s recent monetary and fiscal stimulus may boost real GDP growth by 1-1.50%, positive for Copper and also other industrial metals

Copper soared almost +10% in the last three months, especially +8% in Sep’24 primarily on Chinese stimulus along with synchronized global easing/stimulus on both sides of the Atlantic-as-well as Pacific (Fed-ECB-PBOC). Before that Copper also plunged almost 10% in June and July due to China’s slowdown and a slump in the domestic real estate/construction sector. China is the world’s biggest consumer of Copper; consuming almost 50% of total global consumption amid various applications in industrial metals, led by construction, electronics, and power generation.

China is the world’s powerhouse amid rapid industrialization and urbanization, alongside its push for infrastructure development and technological advancements such as renewable energy (RE) and electric vehicles (EV); all these have made China the world’s biggest consumer of red metal (Copper). Also, other industrial metals, like aluminum, zinc, tin, and steel saw significant price increases amid optimistic demand forecasts.

In the medium to long term, the demand for copper is likely to rise, driven by China's renewable energy (RE) projects, electric vehicles (EV), and global de-carbonization efforts. Copper is essential for energy efficiency from fans to supercomputers and is irreplaceable in the energy transition, suggesting that demand will outpace supply over time.

In summary, China's stimulus and economic policies will play a crucial role in shaping copper demand soon. The outlook for copper prices remains cautiously optimistic, buoyed by long-term trends in renewable energy and electrification, though short-term risks tied to China's economic slowdown remain. The copper market is currently experiencing a dynamic interplay between demand, particularly from China, and global supply constraints. This situation is significantly influenced by China's economic stimulus measures aimed at bolstering its industrial recovery and infrastructure development.

Although silver is classified as a precious metal, it is also a critical component in electrical and electronic applications, such as solar panels and aircraft. From electrical switches and solar panels to chemical-producing catalysts, silver is an essential component in many industries. Its unique properties make it nearly impossible to substitute, and its uses span a wide range of applications. The global industrial shift towards renewable energy (RE), electric vehicles (EV), and the buzzing AI chip sector has collectively bolstered the demand outlook for silver and copper, with both surging due to concerns over undersupply.

Gold is more boosted by the present Fed easing policy/cycle and growing geo-political tensions (Gaza/Lebanon and Ukraine war along with Russia/Putin’s nuke rhetorics). Apart from its haven appeal, Gold is also an inflation hedge traditional physical asset, limited in supply. Growing global public deficit, debt and paper currency devaluation and subsequently higher inflation is good for Gold.

Global Copper Demand:

·         China: Dominates global demand due to its massive infra projects, manufacturing, and growing green energy/tech sectors, led by EV and RE adoption

·         U.S.: Copper consumption is linked to construction and automotive industries including EV

·         EU/Europe: Copper is essential for its RE and EV adoption

·         Developing Economies: DEs like India and Brazil are increasing their copper usage as they expand infrastructure, and construction work and also adopting EV and RE

Key Sectors Driving Copper Demand:

·         RE-Renewable Energy: Copper is a major component in wind turbines, solar panels, and batteries

·         EV-Electric Vehicles: EVs use far more copper than traditional vehicles, leading to a surge in demand

·         Modern Construction: Used in wiring, plumbing, and other building materials

·         Electronics: Copper is essential in the production of smartphones, computers, and various electrical appliances, especially in coil

Global Copper Supply:

Top Global Producers Led by South America’s Rocky Hill Areas:

·         Chile: The world’s largest copper producer, accounting for about 25% of global production

·         Peru: Another significant producer, facing challenges related to political instability and mining regulations

·         China: While being the largest consumer, China also produces some copper but is mostly reliant on imports (unlike rare earth materials/minerals, available in abundant in China’s Himalayan Hill area)

·         Other Major Global Producers: The U.S., Canada, the Democratic Republic of Congo (DRC), and Australia

Present Supply Challenges of Copper:

·         Geopolitical Instability: In some producing countries (e.g., Peru and DRC), political instability is disrupting mining operations from time to time

·         EV-Environmental Regulations: Increased EV scrutiny/regulations on mining practices are slowing production growth or leading to Copper mine closures

·         Copper Ore Grade Decline: Many existing copper mines are experiencing lower ore grades; meaning more material needs to be processed to extract the same amount of copper, which increases costs

·         Recycling: An important source of copper supply, but it's not enough to meet the growing demand of the modern world

Present Market Outlook:

·         Supply Deficits: Many forecasts/experts suggest that copper demand will outpace supply over the next decade, driven by the global energy transition and EV growth and declining supply

·         Price Volatility: Copper prices often tend to be volatile with global economic conditions, demand from China, and supply imbalances

·         Copper demand may double, reaching 50 million metric tonnes (MMT) by 2035 led by incrementally higher demand from China, India the US, and also Europe amid expected construction/infra and GE/EV boost.

·         Global Copper Supply Constraints: Supply has been constrained by lower mine output, labor disputes, and environmental restrictions in major producing countries like Chile and Peru. This tight supply condition is likely to persist, keeping copper prices elevated as demand growth would be more than supply.

·         Chinese Copper Production: Although China is a major consumer, it relies heavily on imports of raw copper. Domestic production is limited, and much of the copper used in manufacturing comes from recycled materials or imported concentrate. Any disruptions in supply chains could increase China's vulnerability to supply shortages and may boost the prices of Copper.

·         Price Outlook: The price of copper is expected to remain volatile in the near term, with Chinese demand playing a key role. Any aggressive stimulus or recovery in the property sector could lead to higher prices. whereas  if economic challenges persist, including any recession/economic slowdown in the US may affect prices

Key Trends Shaping Future Copper Markets:

·         Green Electrification: The world’s shift towards greener energy sources and electrification will intensify demand for copper

·         Recycling and Circular Economy: Increasing efforts to boost copper recycling may help alleviate some supply pressures

·         Exploration and Mining Innovation: Investments in new copper mines and improvements in extraction technologies may also eventually help balance the supply-demand gap

·         Over the next decade, the world may need to add the equivalent of Chile’s entire copper production; otherwise, there is a risk the green energy transition may be delayed.

·         The establishment of new metal mines typically takes years, sometimes more than a decade due to various regulatory uncertainties and also sufficient capex

·         Lithium, another key material in the green energy/EV transition is also in shortage relative to high demand.

China's recent stimulus policies have had a significant influence on global commodity markets, particularly copper, due to China's role as the world's largest consumer of the metal. The demand and supply dynamics of copper are crucial for understanding the current market outlook. In recent years, China has implemented various stimulus measures to bolster its economy, including infrastructure projects, housing development, and support for green technologies. Copper is a key material in these sectors, especially in construction, power infrastructure, and electric vehicle (EV) production.

·         Infra Spending: China's focus on infrastructure, such as railways, power grids, and housing, directly boosts demand for copper, which is essential for electrical wiring and construction materials

·         Green Energy & EVs: China’s commitment to RE and the EV sector further boosted copper demand. Solar panels, wind turbines, and EVs all require large amounts of copper for efficient energy transmission and storage.

·         However, economic challenges, such as real estate debt issues and slowed industrial activity, have led to fluctuating demand. In response, China has been rolling out fiscal and monetary policies to stabilize growth, which could reignite demand for commodities like copper.

·         Growing global trade/cold war mentality against China and geopolitical issues over the Russia-Ukraine war after COVID also affect overall global economic growth and demand for various industrial metals like Copper.

·         Short-term Demand: China’s recent property/real estate market slowdown and decreased industrial output due to weakening exports have recently softened copper demand. However, any renewed focus on infrastructure or green energy could reverse this trend.

·         Medium to Long-term Demand: The global energy transition is expected to fuel copper demand over the next decade, with China remaining a major consumer. Projects related to green electrification, electric vehicles, and renewable energy will drive substantial demand; also global shift toward green energy will help.

·         China's Economic Stimulus: China's recent announcement to issue 1 trillion yuan ($~700B) in ultra-long bonds for infra projects has been a major catalyst for increased copper demand. This move is expected to support the construction sector, which is a significant consumer of copper, accounting for about 30% of total usage. Additionally, the recovery in China's property market is anticipated to further drive demand for copper as construction activities may ramp up.

·         Global Energy Transition: The global shift towards renewable energy (RE) and electric vehicles (EVs) has created a robust demand outlook for copper. As these sectors expand, they are projected to significantly increase copper consumption, with estimates suggesting that demand could double by 2035. The AI boom is also contributing to this demand surge, not only in the AI chip sector but also in the construction of data centers

Global Supply Constraints

·         Production Challenges: Despite a projected increase in copper production, it is expected to fall short of meeting the rising demand. Total global copper mine production was approximately 22 MMT in 2023, with projections reaching only 30 MMT by 2036 if growth trends continue. Additionally, disruptions in key mining regions, particularly in Latin America, pose risks to supply stability.

·         Low Inventory Levels: Current low inventories in major markets like the U.S. and Europe exacerbate the tight supply situation. If Chinese demand continues to rise, there are concerns that visible copper inventories could be depleted by late 2024!

·         Investment Shortfalls/Challenges: The copper mining industry has seen significant underinvestment; with spending/capex nearly 50% lower than in previous years. This lack of fresh investment/capex could lead to a widening supply deficit as demand continues to outpace production capabilities.

On 27th Sep’24 (as previously announced), China’s PBOC cut the reserve requirement ratio (RRR) for banks by -50 bps, the second reduction this year aimed at bolstering a sluggish economy. The change will bring down the weighted average RRR to 6.6%. This move will free up about CNY 1 trillion in new lending, with the central bank leaving room for another cut this year. Additionally, the PBOC trimmed the 7-day reverse repo rate by -20 bps to 1.5%. This rate is used to determine the nation's key lending rates. It also stated interest rates for 14-day reverse repos, as well as temporary repos and reverse repos, will continue to be adjusted in line with changes to the 7-day reverse repo rate. China also asked (instructed) Chinese banks to cut mortgage rates.

China has ramped up the rollout of policy initiatives this week, with its top decision-making body, the Politburo, pledging to introduce further fiscal and monetary support measures to prevent further deterioration of the economy. Subsequently, Chinese stocks, which had been underperforming Wall Street for a long, joined the bandwagon for a synchronized global rally amid synchronized global easing.

As per some estimates, the recent cumulative monetary stimulus may boost the Chinese economy by around 0.80% and along with planned fiscal stimulus, it may be around +1.50%. This is a major stimulus plan by China after the 2008 GFC.

Official PBOC announcement:

24th Sep’24:

·         RRR Cut: 50-bps reduction in the reserve requirement ratio, releasing $142 billion for new lending

·         Repo Rate Cut: Planned 20-bps cut in the seven-day repo rate to 1.5%

·         Mortgage Rate Cut: Average 50-bps reduction on existing mortgage rates (from an average mortgage rate of around 4%)

·          Down Payment Reduction: Minimum down payment for second-home buyers lowered to 15% from 25

·          Stock Market Support: Introduction of a $71 billion swap program for stock market development

25th Sep’24:

·         MLF Rate Cut: Reduced interest rate on 300 billion yuan in one-year MLF loans to select banks from 2.30% to 2.00% (second cut since July 2024)

·         Market Injection: PBOC injected 196.5 billion yuan into its banking system through 14-day reverse repos

26th Sep’24

·         Politburo Meeting: Pledge to support fiscal spending and stabilize the property sector

·         Special Bonds Announcement: Plans to issue 2 trillion yuan (~$284.43 billion) in special sovereign bonds as part of a fiscal stimulus package

Conclusions:

Market Outlook

·         Price Projections: Copper may surge to $5.25-5.50 per pound (lb) by Dec’24 and $7.50-10.00 due to the combination of strong demand and constrained supply. In the near term, prices are likely to remain volatile but supported by ongoing economic recovery efforts in China and global clean energy initiatives.

·         Long-Term Trends: The long-term outlook for copper remains bullish due to its critical role in various industrial applications and the ongoing transition towards sustainable energy solutions. As governments worldwide increase investments (fiscal and monetary stimulus) in renewable energy and infrastructure, copper is positioned to benefit significantly from these trends.

In brief, while short-term fluctuations are expected due to various market dynamics and geopolitical issues, the overall outlook for copper remains positive driven by robust demand from China and global initiatives towards Decarbonization, green energy and technological advancement.

Overall, Chinese and China heavy global stocks, Metals, and even oil were also boosted by China/PBOC stimulus plan to boost not only real estate but also the overall economy from years of slumber, especially after the Trump trade war tantrum and followed by COVID conspiracy theory. The Chinese economy may be now suffering from excess capacity, lower demand, and a subsequent deflation-like scenario. Export-heavy China is also suffering from weak global demand/trade and subsequently subdued domestic demand, resulting in abnormally lower inflation or deflation-like scenarios.

Weekly-Technical trading levels: Copper Fut/CFD

Whatever may be the fundamental narrative, technically Copper (HG) Future (CMP: 4.60), now has to sustain over 4.95 for 5.25-5.50; otherwise sustaining below 4.80, may again fall to 4.50/4.40-4.20/4.00 and 3.90/3.80-3.70/3.50 in the coming days.