Viewpoint: China, vaccines add to copper upside

Copper prices end a tumultuous 2020 surging to multi-year highs, fueled by a post-pandemic demand boom in China and rising optimism for US demand as vaccine distribution ramps up.

Still, much uncertainty persists in the copper market as sustained recovery depends on what happens with Covid-19 vaccines, the US dollar, China's appetite and logistics issues.

Comex copper futures set new highs in December as the weakness in the US dollar had copper breaking above $3.50/lb, a level not seen since February 2013 as the rollout of several vaccines raised investor optimism.

Goldman Sachs analysts are bullish on copper, expecting the copper exchange price strength to be sustained in 2021 with a 12-month forecast for copper at $9,500/t ($4.31/lb) up from its previous estimate of $7,500/t ($3.40/lb) back in October. Goldman estimates an average of around $8,625/t ($3.91/lb) in 2021.

The dollar typically has an inverse correlation to copper and has provided a huge boost to the metal price as it has weakened. Copper is widely priced in US dollars in exchanges around the world. The US currency set a high for the year in March and has trended lower ever since, making it cheaper for holders of foreign currency and boosting demand for the metal.

But China's demand for the red metal ensures it will remain the market leader to watch in 2021. And some see China buying copper in excess of actual production needs and stockpiling.

If China's demand remains strong in the first quarter, US copper scrap spreads may tighten further. China's increase in demand has already put pressure on US copper scrap spreads to strengthen despite the rise in exchange prices.

"I see in the next quarter and into the first half that the copper price will drive spreads to remain where they are or even get a bit wider as industrial activity grows with less virus concerns and free flowing cash," a US dealer said.

Others flagged the potential for lower cathode availability to tighten spreads in the first half of 2021.

Most expect China's appetite for copper to keep pace in the first quarter as it tries to stimulate its economy. And with China looking toward shifting to wind and solar renewables, its copper consumption may grow above the nearly 50pc of global consumption it already claims in the coming years.

The copper supply deficit and drop in overall exchange inventories is expected to improve in 2021. Global copper ore production will grow steadily next year, with new mines or expansions coming online, according to the International Copper Study Group.

US domestic demand improvement will likely hinge on vaccine availability but with a slight uptick to start off January as consumers buy coming out of planned reduced inventory at the end of 2020.

US copper scrap spreads were wide the second half of 2020 as US demand remained tepid amid ongoing waves of the virus continuing to weigh on the economic recovery after a sharp downturn in the first half of the year.

Bare bright spreads started July at 6-8¢/lb under and widened to 19-20¢/lb under by the latter half of October. The next most active Comex copper price went from $2.73/lb to start July to $3.20/lb in mid-October which caused the spreads to narrow along with the lower demand.

But as China got back into the market, US spreads have tightened even with record high exchange prices.

Spreads have come back to 10-15¢/lb under for bare bright in the early part of December while the CME was around $3.55/lb, putting the all-in-price at the highest it has been in 2020.

Bare bright spreads for the year averaged 10-13¢/lb under, marginally lower than 2019 and 2018 with both averaging 10-12¢/lb under the Comex active month. But for all three years spreads were wider than the 2017 average of 8-10¢/lb under. Even though year-on-year spreads were similar, 2020 has had wilder swings, with a high of 4¢/lb under to a low of 20¢/lb under.

By Mike Hlafka