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Metals demand outperforming GDP metrics, copper leads way - Roskill

Highlights

China recovery upholding metals demand

Copper price up 7% year to date

London — Metals demand is outperforming broader economic indicators, with copper leading the way among base metals on a stimulus-fueled infrastructure drive as economies recover from COVID-19, consultant Roskill said.

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Gold prices recently hit record highs and nickel has also leapt forward but may not retain its recent price impetus, the consultancy said.

Roskill foresees that copper consumption may fall just 3%-4% on the year this year, less than an expected 4.6% decline in global GDP. Nickel refined output should be flat, while Indonesian nickel pig iron production -– partly consumed by Chinese stainless steel producers -– soared 60% year on year in H1. Steel output is unlikely to fall more than 7%-8% on a global basis, the consultancy said.

"In terms of metals markets, demand is outperforming broader GDP metrics," Roskill strategic consulting manager Neal Brewster said in an Aug. 26 webinar. "High China and low retail and services exposure is leading to relative resilience in demand."

Strong demand from China, which represents half of metals markets, is a major factor buoying metals and steel, Brewster said.

K-shaped rather than L, V, U or W-shaped recoveries have emerged in some nations but the consensus view is that China's economy is returning to trendline, according to Roskill. Persistent effects of COVID-19 are being seen elsewhere but the double-digit falls in Q2 GDP appear to have been the bottom of the cycle, particularly with Central Banks having increased lending to economies by as much as $65 trillion, and unprecedented falls in interest rates, which point to a strong recovery next year, Brewster said.

The 30% fall in industrial production in the eurozone earlier this year "is about two-thirds made up now but we don't expect a full recovery," he said. "COVID-19 is proving difficult to suppress: the strategy is now managing rather than eliminating COVID-19 until a vaccine is developed."

China's 'panic-buying' copper

Copper had made a full price recovery from COVID-19 within six months, much quicker than anyone would have expected, despite a major Q1 dip, pointed out Roskill associate consultant, copper, Jonathan Barnes. LME cash prices at $6,603/mt on Aug. 27 are around 7% up year to date, thus above pre-COVID-19 levels. Continuing COVID-19 disruption, particularly at South American mines, is likely to reduce total copper mine output by 0.75 – 1 million mt this year, interrupting concentrates exports shipments to China, delaying both brownfield and greenfield projects, and supporting prices.

Copper markets least impacted by COVID-19 have been in the utility power cables and renewables area while demand for connectors for the automotive sector has been harder hit, he said.

Partly as a result of copper concentrates shipments to China being interrupted due to COVID-19 earlier this year, China's copper metal imports hit a monthly high in July, possibly of as much as 600,000 mt, following 500,000 mt imports in June.

"China is importing more refined metal from nearly every country, suggesting a structural shift, not a temporary change," said Barnes, indicating that China's total copper imports could rise 11.5% year on year in 2020. "China has a structural copper deficit...if anything could reveal panic buying in copper, this is it."

Scrap imports slump

Barnes noted that China's imposition of quota restrictions on copper scrap imports as part of the nation's "war on imports of foreign waste," have also contributed to the deficit, reducing scrap imports by 300,000 mt in the first seven months of 2020, and leading to "aggressive" Chinese buying of surplus cathode. Total visible copper stocks (on exchanges and in the bonded market) have fallen 40% from March to below 600,000 mt at the end of July, while LME stocks at just 103,000 mt last week are at the lowest level for 13 years, leading to "potential for further price increases in late 2020."

"However, a world recovery back to 2018 peak levels may take 2-3 years," he said.

Scrap has shown itself to be the most vulnerable link in the global supply chain and world copper scrap flows may not normalize until Q4 or Q1 2021, depending on when China introduces a new regime on imports, according to Barnes.

A new trade regime permitting copper and brass scrap imports as a renewable resource (rather than as 'waste') should have been implemented June 1 but was delayed due to COVID-19 and no firm date for this has yet been set – some shipping lines are refusing to transport scrap after Sept. 1, fearing liability for return shipment if containerized cargoes are rejected by China customs, the Roskill consultant said.

Nickel price

As with other base metals, the nickel price struggled in H1 2020 amid the disruption caused by the COVID-19 pandemic, Roskill said in an Aug. 27 report. During H1, the average LME nickel price stagnated at $12,440/mt, with a low of $11,055/mt in March. Since then, however, a combination of improving macroeconomic sentiment and concerns over nickel raw material supply levels in China, have supported prices back up to $15,077/mt by end-August.

However, "with a large nickel surplus looming for the remainder of the year, underpinned by the impacts of COVID-19 on demand, it is hard to see this price rise being sustained over the remainder of the year," the consultancy said.