Among all the commodities, only copper has been given the delineation of "doctor," as it is one of the only commodities that is the best gauge of the health of the overall economy and gross domestic product.
Given its use in buildings, roads, and general infrastructure, it has been one of the timeliest gauges of the health of the Chinese economy, as they have grown massively over the past decade. If China and world GDP was on an uptrend, copper would always outperform and vice-versa. But this year, as most cyclical and economically sensitive stocks and sectors have underperformed all year, still below 2018 levels in some cases, copper has been stubbornly strong, what changed?
Commodities have and will always be about demand vs. supply balance; it is about how much excess inventory you have of it. If it is in deficit, the prices will keep rising, no matter how expensive. If it is cheap, it will keep falling until something changes, either demand picks up or supply collapses. There is no floor value, unlike equities that have tangible and intangible assets that form the discounted cash flow per se. What happened to oil back in April is testament to this fact, and not one that is appreciated by many.
Over the past few years, copper has been one of the tightest commodities in terms of demand vs. supply, delicately balanced with a forecast deficit and surplus in the range of 50,000-200,000 tons annually. That is because few copper projects have been brought on line or been given incentive to do so. With this balance, there is not much margin of error, especially if China decides to ramp up its purchases in any given year. This year as most economies locked down, causing their GDP to go near 0%, China's government -- eager to get its GDP back to target -- announced several infrastructure projects to speed up the recovery. It is the fastest way really to show better economic numbers. Even though it had decided to move away from an infrastructure-led economy to a consumer driven one, this year has been an exception. This can be seen in China's imports this year as they ramped up purchases in July and August, reaching 3.3 million tons already. What China soaked, offset the demand collapse in rest of the world and this is why copper has been so stubbornly strong, despite a slowing and weak economic picture. Its surplus has now moved to a small deficit this year.
One of copper's demand stories has been electric vehicles and batteries, as the world moves toward a cleaner, more sustainable world. This means copper indirectly should benefit. Even though this demand picks up has been accounted for in the total demand picture, it seems from a sentiment point of view, copper is now seen as the "sustainable" play. These days, walk into any boardroom, smack the word "sustainable" on your marketing brochure, boom, you won't have trouble raising funds.
U.K.-mining stocks -- the STOXX Europe 600 Basic Resources index (SXPP) -- have been flat since August, trending lower, even the copper names like Antofagasta (ANFGF) and Kaz Minerals (KZMYY:OTCMKS). They have been behaving quite logically. U.S. copper names have been on a tear and outperforming copper. But then again, U.S. markets have been outperforming European ones all year, so that can be a factor, too. Regardless, the performance has been varied.
Be that as it may, copper supply is not keeping up with demand this year and some production strikes and delays helped price stay elevated. Next year, ICU forecasts about 4.5% supply increase, that remains to be seen along with China and its thirst for copper going forward, especially as we enter the second and third waves of the pandemic that will impact the global economic recovery. The dollar, too, is key to copper's performance. If it does pick up from here, it can hit copper, along with other commodities. But, given how both Democrats and Republicans are hell bent on spending more, as everyone is has an incentive to keep dollar down for good reason, the selloff probably won't last too long.
For now, all eyes on China and its "infrastructure"-led projects that have allowed copper to break away from its normal correlations. It is best to stay away until that clears.
