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Copper & China: The Intertwined Relationship

The universal truth is China is dependent on copper. When the nation is flourishing and hawkish in its outlook, the nation thrives and so does copper. But when the country is reeling and the outlook is dovish, activities are disrupted and the demand for copper declines. China is the number one importer and consumer of the industrial metal and the records have proven the fact that China is the major engine behind the bullish or bearish nature of the metal.

With the onset of the pandemic in early 2020, copper slumped to a 4-year low value reaching $1.9628 per pound on March 18. However, since March the prices have rallied strongly jumping to $3.1085 per pound on September 20, the highest since June 2018. The recovery in the prices was due to the inclining demand from China and also the deteriorating supply from South America.
Soaring Demand & Slumping Supply

Consuming around half of the global copper supply, the manufacturing and construction sectors of China have registered a robust recovery from the Covid 19 shutdown in the first half of the year. In a surprising turn of events, the Caixin Purchasing Managers Index (PMI), a private barometer of China’s manufacturing activity, increased to 53.1 in August from 52.8 in July. The registered figure was the highest level obtained in nearly a decade driven by strong domestic and external demand coupled with increasing production activities. In hindsight, the August reading marked the fourth consecutive month that Caixin PMI maintained above the 50 levels separating the expansion (>50) and the contraction (<50) categories.

The recovery was boosted by a 50% month-on-month increase in unwrought copper imports by China in June to a record high of 656,483 tonnes, in effect just the double the levels imported in the same month of 2019. As per the reports, copper imports totaled 2.84 million, a 25% increase in comparison to the same period of 2019 despite the interruptions caused by Covid 19 in the first half of 2020.

On the supply front, price of copper has also been supported by numerous factors. Due to coronavirus affecting all parts of the globe, the South American region has not been spared either. Chile and Peru, major producers of copper from the southern hemisphere, continue to confront severe Covid 19 outbreaks. As per reports, the output of copper fell by 42% in May in Peru while Codelco, the state-run mine in Chile, has temporarily closed its largest refinery and suspended construction at its mine until further notice. The disruptions in supply have carried the copper prices higher and with no immediate solutions in the foreseeable future, the supply does look gloomy in its outlook.

Government Backing

Boosted by government stimulus measures, the robust demand for copper from China is expected to continue. Lower borrowing rates along with tax exemptions have been introduced for manufacturing enterprises to assist the sector to recover from the impact of the pandemic. With the 2020 National People’s Congress Work Report specifying infrastructure and urbanisation initiatives as a priority for the year ahead, government infrastructure is also anticipated to increase to offset the slow growth areas in other parts of the economy.
In effect, copper has played a major catalyst in the economy of China which is the world’s largest importer of the metal by a large margin, accounting for 43% of global copper ore imports, more than three times the level of Japan, the second-largest importer. While copper is driven primarily by usage in manufacturing and construction activities, the prices will further be supported by several continuing government initiatives.

Renewable Energy Demand

The switch of China to a renewable energy system supports the demand of copper going forward. In retrospect, the metal is the best non-precious metal conductor of electricity due to the lack of resistance it offers. According to research by International Copper Association (ICA), the global copper demand for wind and solar energy systems is expected to increase by 56% within 2027 from the levels registered in 2018. It further predicts that China will lead the way for annual installations of wind turbines.

Driving Electric Vehicle Sales

One of the important reasons to drive copper consumption is the forecasted increased sales in electric vehicles. Copper is used in batteries, windings and copper rotors of electric motors as well as in the wiring and charging infrastructures. A typical electric vehicle consumes nearly four times as much of the metal in a conventional car, an average of 83 KG of copper per electric car.
China has clear ambitions to be the leading manufacturing center of electric vehicles by 2025 as part of its Made in China 2025 initiative. This ambitious voice would further the demand for copper from its current levels. While more efficient technologies tend to use larger amounts of the industrial metal, the Made in China 2025 is widely expected to boost copper usage in the country by an additional 232,000 tonnes by the year 2025, according to the ICA.

Conclusion

While the short term suggests that copper would be slightly jolted by the pandemic related information around the world, China’s dependence on copper could support prices in the medium to the longer term horizon. As the world confronts the Covid 19 pandemic situation, the demand for the metal is positioned to move higher given the influence of China in the immediate future.

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&d@mexnepal.com

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