Analysis: Restricted supply, shift in China's policy favour higher copper prices

Copper has resumed its upside momentum on expectations of a pickup in demand from the largest consumer, China. 

Copper prices on the London Metal Exchange had climbed to a one-month high of $9,312.50 per ton earlier on Wednesday. 

The upside can be attributed to the recent monetary policy shift of China’s central bank, according to experts.

“This boost is largely due to China's shift toward more accommodative monetary policy and fiscal measures, marking its first major policy adjustment in 14 years aimed at revitalizing economic growth,” Finimize said in a report. 

Meanwhile, analysts with Commerzbank AG believe that restricted supply favoured higher copper prices. 

Rollercoster ride for prices

Copper prices have experienced wild swings this year. 

During the year, copper prices on the LME had climbed to record level around $11,000 per ton in mid-May. This was followed by a fall below $9,000 per ton in the summer months.

The wild swings continued as the market witnessed prices climbing back above $10,000 per ton in September, before falling back again below $9,000. 

Since the beginning of the year, the price is just up around 8% at the time of writing. 

“This is quite remarkable, as the copper market is likely to face a massive supply surplus of 469 thousand tons this year according to the forecast of the International Copper Study Group,” Carsten Fritsch, commodity analyst at Commerzbank AG, said. 

According to the copper study group, supply is likely to grow by 4%, while demand is seen rising by 2%. The ICSG also estimates an oversupply next year at 194,000 tons, which is not nearly as half of this year. 

However, it also expects demand to increase by a good 2.7%, and supply growth to slow to 1.6%. 

Chinese smelting capacities nearing their limits

The main driver for rising supply is China’s expansion of smelting capacities of copper in the last few years. 

According to Commerzbank, Chinese smelting capacities are now expected to account for half of the global supply of refined copper. 

Fritsch said:

However, the expansion is now nearing its limit as mine supply cannot keep pace with expansion of smelting capacities. 

Mine production is likely to have risen much slower than the production of refined copper this year. 

“The shortage of copper concentrate has led to a decline in the treatment and refining charges that the copper smelters receive from the mine producers for processing copper ore,” according to Commerzbank. 

The German bank noted that this made copper production less profitable and thus led to output cuts. 

Undersupply of refined copper in 2025?

If the global supply of refined copper were to rise by just 1% next year, instead of ICSG’s forecast of 1.6%, the oversupply would disappear from the market. 

If the increase in supply were even lower, the market would even be undersupplied, according to Commerzbank. 

Copper consumption in China is expected to increase due to the increasing fleet of electric vehicles in the country. 

“An electric car requires around four times as much copper as a car with an internal combustion engine. In addition, the expected support measures from the central bank and politicians are expected to stabilise construction activity, which accounts for a quarter of copper demand,” Commerzbank’s Fritsch said. 

According to experts, China could once again consume more of global copper supply if domestic supply stalls due to shortage of concentrate and low processing fees. 

Fritsch added:

China’s stimulus could reshape demand

“As the world’s largest consumer of copper, the country’s commitment to 'appropriately loose' monetary and fiscal policies could stimulate demand across multiple sectors, notably construction and power,” Finimize said in its report. 

Finimize believes that immediate reaction to these changes in the monetary policy could be muted. 

But, the “anticipated ripple effects” could stabilise markets and influence supply chains well into 2025, it said. 

Investors will now focus on China’s Central Economic Work Conference, which is likely to set the economic agenda for next year, along with stimulus measures.