Copper, the world’s most important industrial metal, entered a bull market on Thursday, boosted by strong demand from China and hedge funds closing bearish bets.
The metal, which is used in almost all construction projects and white goods and is a big source of earnings for global miners, was up just over 20 per cent from its March low on Thursday evening, above $5,530 a tonne. At that level it meets the normal definition of a bull market.
“Economic data is signalling a robust recovery in the Chinese construction and manufacturing sectors during the second quarter,” said Robert Edwards, principal analyst at consultancy CRU.
Demand for copper in China, where half the world’s output is consumed, has picked up significantly since Beijing eased its lockdown in March.
As its economy has clicked back into gear, physical premiums — the extra price buyers pay to take delivery of the metal immediately — have risen sharply while inventories have plunged as manufacturers scrambled for supply.
The closely tracked utilisation rates at wire rod mills — which account for two-thirds of China’s refined copper consumption — have rebounded, hitting 90 per cent in April.
“Although wire rod output eased during the latter part of May, we now anticipate that China’s refined copper consumption will increase by 2 per cent year on year in the second quarter, compared to minus 3.3 per cent previously,” said Mr Edwards.
At the same time, supply disruptions have continued to increase as coronavirus has swept through South America, home to many large copper mines. Mined copper production in Peru fell 33 per cent year on year in April to 1.5m tonnes, according to the country’s Ministry of Mines and Energy.
“Mine output has been hit by Covid lockdowns, and whilst many companies claim to have got by on reduced personnel, the market is very short of concentrate,” said Ben Davis, analyst at Liberum, referring to the feedstock used by smelters to make refined copper.
In the face of those data points and the general “risk on” mood in markets, hedge funds and other speculators have been closing bearish bets on copper. The net short position fell from a peak of almost 59,000 contracts early this year to just 5,300 at the end of May, according to Commodity Futures Trading Commission data.
Ole Hansen, head of commodity strategy at Saxo Bank, said a sustained break above $5,500 a tonne could further boost prices. “A break may attract fresh buying, not least from hedge funds who have only just managed to reduce their exposure from short to neutral,” he said.
Looking ahead, Mr Edwards said the big question was whether the rally from the March lows could be sustained. Many traders are sceptical, given that 30 per cent of the copper used in China is exported overseas, where demand has plummeted because of the pandemic.
In spite of the pick-up in Chinese industrial activity and mine disruptions, CRU still expects copper supply to outpace demand by 400,000 tonnes this year — the most significant annual market deficit since the global financial crisis.
“In the short term, positive momentum may continue to push the price towards $6,000. However, unless there is an actual shift in supply and demand fundamentals, we expect the price to gravitate back towards industry marginal costs in the low $5,000s,” Mr Edwards said.