Since the lows reached in March 2020 around $4500/tonne, copper more than doubled all the way to $10,600/tonne in May. It has since then been in a side wards trading range between $9000-$10000/tonne all year. For an asset that typically tends to be much racier than most asset classes and moves in line with the economic trends of China, it has been rather boring over the past seven months. Given all the swings we have seen in the macro economic growth story from global growth to slow down, from reflation to inflation, adding in the collapse of the Chinese Evergrande (EGRNF) property bubble, one would think that copper would be a lot more volatile.
Copper is known as Doctor Copper given its heavy macro bias, but then it also has a very important fundamentally driven price based on demand supply trends. This is one of the reasons why it has held flat as over the past year the macro has signaled weakness vs. the micro strength. Sod's law, the price stays flat.
China plays an important role in the price of copper. So when China's economy slows down, it impacts the price of copper and vice versa. After the Covid induced stimulus boost in March 2020, when China along with global central banks pumped so much money in the system in a very short period of time, the price flew up in a straight line. It is a market that is very delicately balanced which when sees a demand surge, supply is not quick enough to catch up. It takes years and years of mining to get solid growth prospects, and all the copper projects are very well known.
In addition, due to the labor shortage problem and Covid closures, this tightened the market even more at a time when demand was surging. But towards the end of 2020, China started deleveraging its economy to rid it of all the Covid induced stimulus and get the economy back to normal mode. This caused a deterioration in the credit impulse and slowdown which hurt the property market amongst other sectors. Given how leveraged China is, a slowdown of any order of magnitude tends to impact the most speculative of sectors. Copper is vital in property and hence, impacted its demand too.
From the fundamental side, copper's secular demand story is driven by infrastructure growth, spending, and electric vehicle demand growth going forward. As global economies got out of the Covid induced slowdown, they boosted infrastructure spending which helped copper quite a bit. The transition to clean energy fuels, energy transition, is also one of the tailwinds that will continue to support the price of copper. That story has not changed, nor will it in the near term. It is the macro that has been weak as most emerging market central banks have started reducing QE and even raising interest rates. The Fed too has started tapering their purchases by $30 bln. a month, albeit they are still adding to the balance sheet through March 2022.
But over the past month, something is changing on the macro side. China has started boosting reforms to "support" the economy and specifically its property sector. They have announced special loans targeted at certain cities to boost demand. It may be that China has slowed down so aggressively this past year, that their Q4 GDP growth may come in around 3.5%-4%, much lower than their 5.5%-6% target, and they may be trying to get the average back up again.
Copper is one commodity that has some of the best bottoms up fundamentals. The charts look supportive, the micro story certainly, and it is important to monitor what China is up to in the background from the macro side as it heads into the Winter Olympics in Q12022. After being boring for most of this year, perhaps it is starting to look perky going into the end of the year. The recent speculative positioning also suggests that traders have given up hope too as positioning seems very apathetic, suggesting there is room for this to pick up if the price wakes up. One thing is for certain, Copper is never a boring asset class.