The price of copper generally is considered among the best gauges of the health of the global economy. So, what is it telling us about the state of the recovery?
Consider that the metal sunk to a horrendous March low of $4,600 per tonne, then ground its way back to $5,500 a tonne, where it paused for some time as the market debated whether it was seeing a sustained economic recovery or just a bounce off the lows. Then in June it rallied 13% and now is trading closer to $6,100 a tonne, or just 3% shy of the level at which it started the year. In other words, it has had a colossal 33% rise since March.
Even prior to the Covid-19 crisis, the market for copper was tight because demand versus supply has been balanced, pointing to a small deficit at most times. This is why the price has been so resilient even in downturns as the demand collapse usually just matches a supply side unable to keep up.
Supply is usually easier to track than demand as we can see global miners' projects in the pipeline and the probability of them coming to fruition. Demand is the much harder side of the equation to monitor. It is very sensitive to world GDP, especially Chinese demand. Hence, it got hit extremely hard when China shut down.
As China is opening back up with its manufacturing rebounding, copper is facing supply side constraints in Chile, the world's largest producing nation, due to coronavirus concerns and mine closures on back of quarantining. Codelco's curtailment of some smelting operations last week after fatalities among its workforce shows just how at risk the supply side is.
China's net imports of refined copper jumped 12% year over year to 1.38 million tonnes in January through May. The official Caixin purchasing managers' indices have bounced back above 50, and together with trillions in yuan loans toward metals-intensive infrastructure projects they have aided the recovery in the price of copper.
China is desperate to boost its GDP growth, or in this case defend it, and the fastest way to produce good economic data is to boost infrastructure spending. It goes against China's long-term deleveraging of industrial investment in favor of consumer investment, but right now it just needs to provide a floor to the data.
In addition, China is very strategic. There has been speculation the State Reserve Bureau has been using this price weakness to top off its strategic inventories of the metal, which is quite possible as China has a buy-low, sell-high mentality. The same was seen in oil. Chinese officials are extremely shrewd in purchasing their raw materials and are very opportunistic and tactical.
It seems countries around the world are desperate to boost their economic numbers and fend off a recession or slowdown. The best way to get any economy moving is to invest in infrastructure, as building bridges and roads helps boost employment. Officials in Europe have proposed a 150 billion euro "Green Deal" that targets sectors such as electric vehicles that use copper. President Trump is touting an infrastructure bill on the order of $1 trillion to $2 trillion to boost employment, and it would be copper intensive, adding to the demand side.
The biggest unknown after this reopening recovery in markets and asset prices is whether growth will be V-shaped or more U- or even W-shaped. We know that the only reason the market and asset prices are up is due to the unprecedented liquidity injections by central banks. It is like trying to jump-start a car that has been dying for the past year but the owner does not want to scrap it. It is throwing everything at the car just to keep it moving and buying time that the car can move on its own without the push.
There is a risk that the Fed panicked and pumped way too much money into the system. We all know that it will be less willing to take it out than it was eager to put it in. The year 2018 was a clear example of how the Fed will never dare try to normalize its balance sheet, even though it should. Deflating away the debt is its only salvation.
The next few weeks are critical as the second wave of the virus is showing up and a number of large U.S. states are delaying their re-openings. This can provide a temporary halt to the hope rally and even put a damper on Chinese exports.
July will start to see data that is more real than the June data that showed a massive bounce from artificially low to zero levels. Regardless, copper is fundamentally one of the tightest base metal markets out there and companies have not spent that much in the way of capital expenditures on larger projects. They are few and far between; however, supply is tight. This is one commodity that should be bought on any weakness, barring a full-blown economic recession or collapse.
