- China consumes half of the world's copper, and the country's factory activity reached its highest level since 2011 in August.
- China's switch to renewable energy systems is likely to be a major driver of demand for copper in the future.
By Sachin Patel, CME Group
Copper prices have rallied strongly since the 11-year low in March. After a brief trade below $ 2 a pound, the metal has regained 50% of its value as demand from China rises and COVID-19 affects supply from South America.
Increasing demand, decreasing supply
China's manufacturing and construction sectors, which use around half of the world's copper, have rallied sharply after the COVID-19 shutdown earlier this year. The factory activities took place in August Reached the highest level in nine years.
This recovery was reflected in China's raw copper imports increasing by 50% from the previous month to a record high of 656,483 tons, a little more than twice as much as in the same month of 2019. In the first six months of 2020, copper imports totaled 2.84 million, a 25% increase over the same period in 2019 despite the disruption caused by COVID-19.
The copper price is also supported by supply factors. The two largest copper producers in the world, Chile and Peru, continue to face severe COVID-19 outbreaks. In Peru, copper production declined 42% in May, while Chile's state-owned mining company Codelco did temporarily closed its largest smelter and refinery and floating construction at his flagship mine.
The strong demand for metal from China is expected to continue, which will be encouraged by government stimulus measures. Tax exemptions and lower lending rates have been introduced for manufacturers to help the sector recover from the effects of the pandemic.
Government spending on infrastructure is also expected to rise in 2020 to offset slower growth in other areas of the economy. In the working report of the 2020 National People's Congress, infrastructure and urbanization initiatives are highlighted as a priority for the coming year. According to the report, 3.75 trillion renminbi would be issued in 2020 to fund the infrastructure program – an increase of 1.6 trillion from 2019. Both manufacturing and infrastructure are major consumers of copper.
Copper has long played an important role in the Chinese economy. China is currently by far the world's largest copper importer with a share of 43% of global copper ore imports – more than three times as much as Japan in second place.
While copper consumption in China is primarily driven by the fact that it is an important component in manufacturing and construction, a number of ongoing government initiatives are expected to further increase demand.
Renewable Energy Demand
China's switch to renewable energy systems is likely to be a major driver of demand in the future. Copper is the best precious metal conductor for electricity because of its lack of resistance. This property makes it an important component in energy efficient generators and renewable energy systems, with solar and wind turbines using larger amounts of copper than traditional thermal power generators.
According to research by the International Copper Association (ICA), global copper demand for solar and wind energy systems will increase by 56% by 2018 compared to 2018. Although the ICA does not provide a breakdown by country, it predicts that China will maintain its leadership role in annual wind turbine installation.
In the short term, demand for copper could rise as projects are brought forward after the Chinese Energy Agency announces that subsidies are being granted for new offshore and onshore wind farm projects will end sometime later in 2020 and 2021 respectively.
Electric vehicle production should also boost copper consumption in China. Copper is an important part of electric vehicles, used in batteries, windings and copper rotors of electric motors, as well as in cabling and charging infrastructure. With an average of 83 kg of copper, the typical electric vehicle uses almost four times as much metal as a conventional car.
While electric vehicle sales have been subdued in recent months due to a combination of the COVID-19 pandemic and a reduction in government subsidies, China has ambitions to be a leading electric vehicle manufacturing center by 2025 as part of its Made in China 2025 initiative . Such a move would further support the demand for copper.
In fact, the government's Made in China 2025 initiative, which aims to improve the country's manufacturing processes to produce higher quality products, is having a profound impact on the metal. More efficient technologies tend to use larger amounts of copper. As a result, Made in China is expected to increase copper consumption in the country by an additional 232,000 tons by 2025, according to the ICA.
Copper consumption is expected to increase in a number of areas including industrial motors and higher-efficiency distribution transformers, electrification of new railways, and new energy vehicles for industrial use.
Prices for copper derivatives
The rebound in copper prices has caused COMEX copper futures to move from a large net short to a fairly large net long. In the medium to long term, the great importance of copper for the Chinese economy could support prices.
As the world emerges from the COVID-19 pandemic and the demand for metal in China will increase, market participants will see a greater need for copper risk hedging. The global economy could also see higher or lower growth due to the widespread use of copper and unique demand patterns.
This post was created by CME Group with Insider Studios.