This article was prepared by Macquarie's Commodities Strategists for LME Week 2019.
24 October 2019
Copper prices have been riding the wave of the US/China trade war since it began in 2018, resulting in its market being priced and dedicated in strife with the accompanying headwinds for global economic activity.
The real impact on industrial activity levels began to emerge in Q3, with a raft of negative PMI and ISM readings. In the latter case, an extremely weak US export number was a key contributor.
While US imports of Chinese goods that were hit by tariffs starting in 2018 are down 28 per cent year-on-year in the year to August.
Chiming with these results, Macquarie’s proprietary monthly survey of copper fabricators in China also highlighted weakness in the white goods and machinery sectors.
Europe’s market also appears fragile from the macro prints to the anecdotal evidence we hear on the ground for each of the metals markets. These problems have led us to reduce our estimate of global copper demand growth to 0.6 per cent in 2019, with North America and Europe (27 per cent of the market) seen contracting by 2.5 per cent, and China (49 per cent) seeing growth cool to 2.0 per cent, down from 5.4 per cent last year.
Of course, supply has been weak too. For China’s smelter capacity growth has been constrained by a lack of concentrates from the mines. We see do expect a recovery in mine supply in 2020: Grasberg, Indonesia; from Zambia generally, and new supply from Cobre Panama, in Panama. Expectations for this general supply lift is already buoying copper's spot treatment and refining charges.
In the secondary market, China's ban on scrap imports threatened to disrupt the country's broader copper supply from mid-year when it was imposed. But before the restrictions were imposed, the industry successfully lobbied the authorities to instead release batches of import quotas. More importantly, a planned 2020 ban on total solid waste imports – which would have covered industrial metal scrap – also appears to have been at least deferred.
For prices, this means only a light hand on the tiller from the fundamentals amid the stormy seas of the trade war. We look towards stimulus in China targeting infrastructure activity to provide some upside over the next one to two quarters, but in the meantime copper prices will continue to be weighed down by the gathering gloom. We see a trend into the mid $USD5,000/ per tonne on this basis, with stability beginning to be found next year.