Copper Market at a Crossroads: Supply Surplus Looms Large

Copper, often hailed as an economic barometer for its widespread use in power, transportation, and construction sectors, has recently been riding a wave of uncertainty. Several factors have contributed to this fluctuation, making it essential to dissect the current scenario shaping the copper market. One of the primary factors influencing the copper market is the delicate balance between demand and supply. Copper demand traditionally experiences a seasonal slowdown during winter, coupled with a patchy economic recovery in China, a significant consumer of the metal. Furthermore, the ongoing global economic uncertainties have cast shadows on the market, making investors cautious.

On the supply side, copper faces a surplus conundrum. Analysts are predicting a surplus of 112,000 MT this year, with oversupply expected to rise to 302,500 MT in the following year, marking a 61% increase from previous estimates. Despite a recent decline, stocks in the London Metal Exchange (LME) warehouses have climbed, while copper stocks in Shanghai Futures Exchange (SHFE) warehouses saw an 11.3% rise, although they still linger around a one-year low level. Anglo American, a major global miner, lowered its 2023 production guidance for copper due to curtailments at its Chilean operations. Despite this reduction, copper output increased in the first nine months of 2023, primarily due to the ramp-up of its Quellaveco mine in Peru. Apart from China, the global production scenario also shapes the copper market. In September, Chile, a major copper producer, recorded a 4.1% year-on-year increase in copper production, reaching 457,393 tons. In contrast, the BHP-controlled Escondida mine saw a remarkable production jump of 25.5%, and the Collahuasi mine, run by Glencore and Anglo-American, inched up 1.3%. This uneven production landscape in Chile adds to the market's complexity. On the global front, the refined copper market showed a 33,000 metric ton deficit in August, compared to a 30,000 metric ton deficit in July, indicating a tightening supply-demand balance. This suggests that while copper faces surplus challenges in some regions, the global market is gradually moving toward equilibrium.

Global economic indicators, especially concerning the United States and China, play a pivotal role in shaping copper prices. The recent US job data reinforced investors' expectations that the Federal Reserve would maintain interest rates at their current levels. Additionally, China's economic policies, such as the approval of a 1 trillion-yuan sovereign bond issue and the bill allowing local governments to front-load their 2024 bond quotas, have provided some support to the market. However, China's manufacturing data falling short of market expectations has raised concerns about copper's demand outlook. Amidst the challenges, there are positive signals for copper's future. The growing demand for green energy and electrification, driven by the increasing use of copper in products like solar panels and electric cars, presents a promising outlook for the metal. This trend is expected to drive significant growth in copper demand in the coming years. Additionally, the Caixin/S&P Global services purchasing managers' index (PMI) rose to 50.4 in October from September's nine-month low of 50.2. While this suggests a slight improvement, the pace of expansion remains slower than the first half of the year's average. It's evident that the services sector in China is facing challenges, impacting copper demand.

China, as one of the largest consumers of copper globally, plays a pivotal role in shaping the copper market. The country's economic policies and performance have a profound impact on the metal's prices. In recent times, China has faced economic challenges, including a patchy economic recovery and declining home sales. Home sales by the leading 100 property developers fell 28 percent in October from a year earlier to CNY 406.7 billion (USD 55.6 billion), compared with a 29.2 percent year-on-year slide in September. However, October’s sales saw a modest rise of 0.6 percent on the month. This indicates that the real estate sector in China remains a significant factor in copper demand, and its performance has been mixed. Furthermore, China’s copper imports hit a ten-month high in October, as declining domestic stocks and firm demand underpinned buying activity. Imports of unwrought copper and copper products used widely in the construction, transport, and power sectors, reached 500,168 MT, the highest since last December, according to data from the General Administration of Customs. China’s domestic copper inventories have declined in recent months, with stocks on the Shanghai Futures Exchange at a 13-month low as of October 27.

Copper demand is not limited to China; it's also making waves in India. Copper demand in India surged by 16 percent, reaching 15.22 lakh MT in 2023, up from 13.11 lakh MT in 2022. These findings are part of the Copper Demand Study in India for fiscal year 2023, released by the International Copper Association India (ICA India). To meet this growing demand, production of refined copper (cathode) in India increased from 485 KT in FY22 to 563 KT in FY23. To fill the supply gap, net imports of refined copper increased by 180%, and the use of secondary copper (direct melt) also saw a substantial 22% increase. This surge in copper demand in India is driven by various sectors, including power, transportation, construction, and the growing emphasis on electrification and green energy initiatives. India's robust economic growth and infrastructure development plans are further boosting copper consumption in the country.

Currently, the copper market is at a crossroads, with forecasts indicating a transition from a supply-demand balance in 2023 to a looming supply surplus in 2024. This shift carries significant implications for copper prices, potentially putting downward pressure on them due to concerns of oversupply. China, a powerhouse in the global copper market, is a key player, accounting for approximately 55% of the world's refined copper consumption. The nation's rapid economic recovery, driven by post-pandemic stimulus measures, is expected to have a positive impact on copper prices. Additionally, the ongoing global pivot towards cleaner energy and the expansion of semi-manufactured product capacity in various countries are poised to drive higher global refined copper usage in 2024, offering further support for copper prices. The value of the US dollar is another critical variable influencing copper prices. Historically, a weaker US dollar has often coincided with rising copper prices, making currency valuation a key consideration for copper market participants. Furthermore, government monetary policies, particularly those of the US Federal Reserve, play a pivotal role in shaping copper prices. With the last expected rate hike in May 2023 predicted to be dovish due to economic challenges, this policy stance could significantly impact the direction of copper prices. Global economic sentiment is yet another influential factor in the copper market, with concerns about a possible global recession contributing to recent declines in copper prices.

Thus, the ongoing global transition towards cleaner forms of energy is expected to boost medium- and long-term copper demand. Copper is an essential component in renewable energy technologies such as solar panels and electric vehicles. However, several supply-side challenges, including underperforming mines in Chile, political protests in Peru, and issues within the smelting sector, could potentially restrict copper supply. These challenges may offset the anticipated supply surplus in 2024, helping to mitigate potential price declines. Moreover, the recent downturn in copper prices has discouraged new investments in copper-related sectors, particularly in electric vehicles and power grids. Nevertheless, the prospect of substantial investments in infrastructure and regulatory changes aimed at encouraging property investors to purchase additional homes could provide support to copper prices. Increased demand for copper in construction and infrastructure projects resulting from these developments might help stabilize the copper market.