Copper Rally Halts– A Potential Casualty Over Supply Chain Restoration

  • September 25, 2020 09:42 PM AEST
  • Team Kalkine
Copper Rally Halts– A Potential Casualty Over Supply Chain Restoration

Summary

  • Copper which has been the poster child over its strong price recovery since the beginning of the second quarter is now witnessing a hurdle as the rally loses steam.
  • Post deriving its support from a robust demand in China and supply lag, the commodity is facing some blockade over restoring supply chain.
  • The production figures from ICSG suggest that copper production in previously disrupted mining areas is picking momentum, which along with building inventory across China, is keep a lid on the copper rush.
  • However, long-term sentiments around copper remain strong with many industry experts pointing a boom in prices over the growing penetration of EV across the globe and the changing battery chemistry.

An impressive recovery amid a sentiment splash has helped copper see strong rally. Copper prices rallied from USD 1.9795 per pound (intraday low on 19 March 2020) on COMEX to the recent high of USD 3.1210 per pound (intraday high on 21 September 2020), to mark a price appreciation of ~ 57.67 per cent.

The rally in copper prices was well supported by robust demand for base metals in China amid infrastructure push and government stimulus on fixed assets. Apart from robust demand for base metals in China, challenges across the supply chain over the COVID-19 outbreak has also fanned the price of the commodity.

However, as the supply chain is witnessing a recovery with many mining operations back to nearly full capacity, copper seems to be waiting for fresh rounds of sentiment around the commodity.

But considering the overall global economic scenario, it could be said that the commodity might need to wait a bit now for perception around economic conditions to change before it could continue its next wave.

Many independent forecasters such as the Department of Industry, Innovation and Science (or DIIS) anticipate that copper consumption would witness a downturn ahead over the estimates of negative GDP growth and weak industrial output.

DIIS estimates the global copper consumption to witness a decline of 2.5 per cent in 2020 to reach 23 million tonnes.

Furthermore, while the consumption is estimated to take a hit over the short-term, the supply chain seems to be revamping now.

Production Figures Pointing Towards Restoring Supply Chain

As per the recent data from the International Copper Study Group (or ICSG), the world mine production that declined by 4 per cent in April-May over stringent lockdown imposed by many nations across the globe, witnessed a recovery in May and eased in June 2020.

  • On a monthly basis, the world mine production witnessed a 2.36 per cent increase in June 2020 with the mine capacity utilisation rate increasing to 81.5 per cent as compared to 77.3 per cent in the prior month.
  • Furthermore, in Peru, few major mines affected by operational challenges due to bad weather and COVID-19-related restrictions started to recover in June 2020.
  • As per the data from ICSG, the mining output in Peru that declined by 20 per cent during the first half of the year 2020, including a 38 per cent decline in April to May, narrowed considerably to reach just 9 per cent in June against the previous corresponding period (or pcp).
  • Moreover, in other mining-rich countries such as Chile, the copper output increased by 2.6 per cent, recovering from the production constraints seen in 2019.

Likewise, in the Democratic Republic of Congo (or DRC), the mine production surged by 5 per cent in the recent past with output from ramp-up mines offsetting the temporary closure of the Mutanda mine in December 2019.

In Indonesia, the transition of two major copper mines in 2019 led towards growth of 18 per cent in copper output.

Copper Stocks Building Across Exchanges

The preliminary data report from ICSG shows that cumulative copper stocks at the end of August 2020 across major exchanges, i.e., LME, SHFE, and COMEX surged by 11 per cent or 33,445 tonnes to stand at 335,832 tonnes with stocks increasing 38 per cent across SHFE, 127 per cent across COMEX and declining 39 per cent across LME.

While there are some short-term challenges ahead of the commodity in terms of a slight hit to the demand from China amid surmounting inventory and restoring supply chain, the market anticipates that copper prices would derive growth from the large EV penetration across the globe, prompting many ASX-listed copper miners to develop prospects.

To Know More, Do Read: Copper Rush Drawing Australian Titans; Australia To Climb the Supply Ladder?

Furthermore, the EV rush across the globe is picking up some momentum with the cost curve of running an EV coming in parity with the internal combustion engine (or ICE). Also, many nations are now providing hefty subsidies on EV purchase, allowing EV makers to reduce the selling price to take advantage of subsidies and push sales.

In a nutshell, this push towards the electrification of vehicles along with changing battery chemistry holds the potential to bring a radical change in the copper market.

To Know More, Do Read: Climate Change, Reduced Engine Cost, High Subsidy – Throttles The EV Industry

Copper on Charts

COMEX Copper Continues Chart (Source: Refinitiv Eikon Thomson Reuters)

COMEX Copper Continues Chart (Source: Refinitiv Eikon Thomson Reuters)

On following the daily chart, it could be seen that copper is currently testing the support trendline, which is overlapping with the 50-day exponential moving average; thus, is decisive in nature. A breach and price action below the same could seed short-term bearish sentiments and vice versa.

  • Also, the -2 Standard Deviation of the 20-day simple Bollinger band is falling around the same region, and the ability of the commodity to sustain above the same would decide the direction ahead.
  • The pair of 50-day EMA and 200-day EMA is showing a positive cross with the 50-day EMA crossing the 200-day EMA from below.
  • The overall setup around copper futures looks mixed with the price testing a crucial support level, a break of which or failure to do so would dictate sentiments around the commodity.
  • However, one strong negative signal (short-term) emerging on technical indicators in the divergence between the price action and the 14-day Relative Strength Index with prices making new highs and RSI failing to follow suit.
  • Furthermore, the On Balance Volume is also getting flat, suggesting that the market is waiting for the commodity to decide its direction before further one-sided participation could be seen.

 

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