Basic Materials Copper – Signals Point to a Surprisingly Tight Market

Copper inventory in China bonded warehouses & SHFE have drawn down since late March as activity levels pick up following COVID -19. This is a bullish signal, especially in combination with a recovery in refined Cu output.

10 Jun 2020

China Bonded Warehouse Stocks

Source: SSM, Bloomberg, UBSe

This line graph shows China bonded warehouse stocks, in kilotons, from May 2016 to May 2020.

UBS View: Copper market appears tighter than our expectations

At the end of 2020Q1 we forecast a sharp copper price decline in Q2 due to a contraction in demand from the impacts of COVID-19 on global economic activity and deflation. However, COVID-19 also impacted mine supply and the scrap trade which was greater than the downshift in demand and supported prices. The copper price has been higher in Q2 than we expected and there is no evidence of large market surpluses. A review of the trade signals appear to signal a balanced copper market that supports a recovery in prices to US$3.00lb in 2021e as the global economy recovers.

Supply: LATAM restrictions easing, but Chile risk remains

A normal year for mine supply disruption in the copper trade is between 3-8% with historical average of 5%. It appears 2020 will either set a record for disruption or be close to it. From here however, it appears that COVID-19 disruptions to mining operations are dissipating with many producing countries (including Peru & Mexico) easing mobility restrictions from May onwards. But Chile which is ~30% of global supply is at risk of disruption, shipments have been stable year to date. Concentrate supply appears to remain tight at present as evidenced by low treatment charges.

Demand: Some signs of life despite our fears

We had ultimately thought weak demand due to lockdowns and a global recession would drive market surpluses which would manifest in rising inventory. There does not appear to be evidence of this, inventory in bonded warehouses and on exchanges has declined. China’s grid spending, which is a driver of ~15% of global demand contracted in Q1. But the grid budget has been lifted +2% year over year (from -9%), which should see better demand from this major driver. While consumer demand is weak YTD, there is some evidence of pent up demand, with China’s car sales +5% year over year for April. Rest of World PMI’s still show contraction, but show a lift in May from lows.

Price & equity read through

Speculators have recently closed their short position. Were they to move to a net long position this could drive the price higher. We forecast the price to lift to US$3.00/lb in 2021e which is where we judge an incentive price required for new supply.

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