Tepid China demand and surging inventories sent copper to multi-month lows

Copper has declined by more than 17 percent from its lifetime highs. Tepid demand from China, surging inventories in warehouses, and a strong US dollar have contributed to the bearish sentiment in prices.

Copper inventory levels at different warehouses have reached multi-year highs. Latest London Metal Exchange (LME) data show that inventories in the LME-registered warehouses have jumped to near five-year highs and doubled in mid-June. China’s SHFE warehouse stock levels are also near four-year highs.

This increase was due to a rare surge in exports from the world’s largest commodity consumer, China. Despite the government’s stimulus measures, China has reported a series of disappointing economic indicators recently.

The second-quarter economic growth of the country fell short of expectations, and manufacturing numbers have contracted for a fourth consecutive month in August, reflecting underlying weakness in the economy.

Forecasts suggest that China’s copper demand growth will be limited to 1-2 percent this year due to a sharp contraction in the manufacturing and property sectors.The post-Covid economic recovery in China has been brief and less robust than expected earlier. The enduring crisis in its real estate sector and the trade war with the US are causing a lack of confidence among households and businesses. This is denting consumption and affecting demand for commodities.Big investment banks have slashed their price outlook for copper in the coming years. Recently, Goldman Sachs, once a major proponent of the metal, reduced its price target for copper next year to $10,100 per tonne, down from an earlier forecast of $15,000 per tonne. This adjustment was primarily due to shrinking demand from China. The bank also believes that achieving China’s targeted growth will be challenging this year due to the persistent downturn in the property sector and slowness in manufacturing and exports.A strong US dollar is also pressuring metal prices, as a firm dollar makes commodity prices in US currency more expensive for buyers using other currencies.

The broad advance in industrial metals had earlier sent copper prices to a fresh lifetime high, reaching Rs 945 per kg in the Indian futures market, gaining about 30 percent in the first six months of the year. However, since then, prices have corrected sharply due to the tepid China demand outlook.

A similar performance is seen in benchmark LME copper as well. It tested a new record peak of $11,104 per tonne in May but corrected soon after.

Nevertheless, it is still believed that world copper demand will double over the next decade, which will drive prices. Copper is a critical energy transition metal crucial to the global rollout of clean energy, and there are speculations that the world’s mines will struggle to meet upcoming demand. Traders are optimistic that millions of tonnes of new supply will be needed in the coming years for areas like electric vehicles, renewable energy, and vastly expanded power grids.

Despite a bullish long-term outlook, the prolonged crisis in the Chinese property market and a moderate global growth outlook continue to put pressure on prices. However, a more meaningful pickup in Chinese demand could lead to a sharp turnaround in prices.

(The author, Hareesh V, is the Head of Commodities at Geojit Financial Services. Views are his own.)