An outright copper bull could point with some optimism towards recent medical evidence published in the New England Journal of Medicine that the coronavirus survives for much less time on copper surfaces than on plastic.
Whether this will have any real impact on demand over the coming months is open to question, but the idea that copper consumption could increase as it gets incorporated into face masks and is built increasingly into new hospital fixtures and fittings is at least a good news story in a market that has faced significant uncertainty over the past month or two.
The copper price dropped by nearly 20% as the coronavirus panic began to spread, although it has since recovered some ground and is currently trading at US$2.31 per pound.
Where it goes from here though is a matter of considerable conjecture, given that the importance of the usual fundamentals in making judgement calls is itself open to question.
Broker Liberum argues, for example, that in the current circumstances for short-term price forecasting it’s preferable to focus on what it calls “high-frequency data”, namely speculative positions and inventories, as opposed to looking out to the usual longer-term factors of supply and demand.
Supply, for example, is currently constrained by a ballpark 25%, as capacity has been cut at major mines the world over. But how long that will last remains an open question. Already South Africa, admittedly not a major copper producer, has eased restrictions on mining operations during its lockdown, and other countries may follow.
Equally, while demand has fallen significantly, it hasn’t yet fallen off a cliff, and there is the welcome, if unpredictable development of China’s ongoing economic re-start to factor in. Will Chinese demand pick up where it left off? The smart money might say no, but against that runs the latest Chinese manufacturing PMI data, which has rebounded and is now at a level roughly comparable with where it was at before the crisis hit.
But that in turn prompts the much broader question, which is being asked the world over, and not just about Chinese copper consumption or PMI data – how much can you trust the Chinese data? And the answer again, is we just don’t know. Generally though, doubt and trust don’t go together.
So what can be said positively about the copper market?
The first thing is that the share prices of the major producers have bounced back, not quite to where they were before the crisis, but at least to comparable levels. Antofagasta (LON:ANTO) is now trading at just above its 2019 low, after having risen by more than 20% over the past month. Glencore (LON:GLEN) and Kaz Minerals (LON:KAZ) haven’t done quite as well, but it does seem as though the worst of the initial shock is now over.
Second, inventories in exchanges and Chinese bonded warehouses are lower than their seasonal averages, meaning that with mines producing at just 75% of capacity there’s likely to be some near-term tightness in supply.
Set that against a drop-off in demand the global economy slows. In particular, analysts have tended to look at investment in real estate and power plants in China as a guide, and these, unsurprisingly, are both down.
On the other hand, the Chinese credit markets are open and may yet succeed in propping things up. Finally, short positions in the markets are declining, meaning both that sentiment is improving, at least relatively, and that current pricing may be more pegged to fundamentals than it’s possible to show.
Liberum remains cautious, however.
“For the copper price we are expecting a small improvement in the second half of the year to $2.50 per pound as the global economy recovers,” the broker says, noting the double digit hits this is likely to involve for the major producers.
But what about the longer-term?
One line of thinking has it that the current disruption will end up being bullish for the long-term since pre-crisis forecasts were already predicting a doubling of demand by 2030. Those forecasts were based partly on the new demand from electric vehicles, and more generally on ongoing economic growth from China and elsewhere.
But with mines shut down and investment being withheld, the likelihood of the industry being able to boost capacity to meet that demand becomes open to question.
It’s on that basis that at the smaller end of the mining market entrepreneurs like Colin Bird are actively seeking out new copper deals in tried and tested mining jurisdictions like Zambia. One of his vehicles, Galileo Resources (LON:GLR) already has a significant footprint in the country, albeit in zinc. But a move to copper may not be long in coming, perhaps from another of his companies, Xtract Resources (LON:XTR) which already owns a small copper project at Eureka, also in Zambia.
Elsewhere, Kavango Resources (LON:KAV), Metal Tiger (LON:MTL) and Power Metal Resources (LON:POW) all look well positioned in Botswana, while Asiamet (LON:ARS) looks set fair in Indonesia, and Alien Metals (LON:UFO) similarly in Australia.
“If the chartists are right about the demand, I don’t know where the supply is coming from,” says Colin Bird.
“By 2021 and 2022 there’s going to be an insatiable demand for copper. I think the risk-reward of copper is tremendous. Gold may go up and may go down, but copper is easy sums, you don’t have to go to Harvard to know supply won’t meet demand.”