Refinitiv: There’s Still Upside Potential for Copper Prices in Q3

Copper prices have been hit this past week as fears about increasing global coronavirus cases turn investors away from riskier assets and toward safe havens.

The metal has rebounded from its March low of US$4,617.50 per tonne to around US$6,400 currently.

With concerns about a potential spike in cases dominating news headlines worldwide, Karen Norton of Refinitiv told the Investing News Network that her firm is already assuming in its forecasts that there will be a second wave of COVID-19.

“In supply, while complacency would be unwise, we also assume that containment measures in the main will be more successful, localized and not last as long when implemented,” she said.

“Implementation of strong safety measures at mines in Chile, following union calls, will hopefully lead to improvements that will help in this regard.”

On the demand side, top consumer China has already demonstrated its ability to contain new outbreaks of the virus quite quickly.

“Demand is seen falling more than 1 percent in 2020, but the second half will see improvements, helped by the recovery in air conditioner output and 5G network construction,” Norton explained.

However, it is important to remember that as the top exporter of copper-containing products, China’s consumption is also reliant on the effectiveness of major destination countries.

“With some of the latter dealing with the situation better than others, there is potential for a negative impact,” she said.

In terms of copper demand in Q2, the increase in Chinese demand has been to the upside of general expectations, helped by restocking and scrap shortages.

“This is significant given that China is likely to be relied upon as the main impetus for demand in the coming months. However, Chinese copper consumption was facing a slow growth scenario before COVID-19, and any recovery, whatever its shape, will not prevent a decline in demand there this year.”

With the stars aligning in terms of a rebound in Chinese copper demand and a news flow that largely supports the view that mine supply is tight and tightening, there is further upside potential for prices in Q3, Norton said.

“We remain cautious of this uptrend being sustained, however, and conditions are likely to become more volatile, with prices susceptible to market perception of the latest piece of news related to COVID-19 and/or China/US trade relations,” she added.

Refinitiv’s last forecast for copper was US$5,500, and for now the firm is leaving this unchanged.

“We believe that prices are inflated at the moment and susceptible to weakening sharply if sentiment takes a knock,” she said. “However, we concede that if anything we are likely to find it necessary to revise this figure upwards when we next review.”

For Refinitiv’s base case view on the supply side, the worst is behind for copper mine production.

“Declines in H2 will be smaller, albeit still sizeable. Mine output will be down a substantial amount year-on-year (around 4 percent), but growth is on the cards again from next year and as it becomes clearer this may have a slight dampening effect, even though that growth will be from a low base.”

Commenting on output results in Q2, Norton said there have been no major surprises so far, other than that one or two mines have managed to exceed her expectations.

One example is the Collahuasi mine in Chile, the world’s second biggest, according to Refinitiv’s Mine Production Database. Even on a cautious view, it now looks set to produce around 600,000 tonnes this year, up from 565,000 tonnes last year.

According to Refinitiv’s data, Q2 is likely to be the worst quarter in terms of mine production losses this year at around 140,000 tonnes. But the firm is also looking for year-on-year declines in Q3 at around 120,000 tonnes, and in Q4 at around 90,000 tonnes.

“This will continue to restrict refined production growth in Q3 and the remainder of 2020,” Norton commented. As a result, Refinitiv is expecting a relatively sizeable global market surplus in 2020 as supply disruptions only partly mitigate.

When looking at the months ahead, Norton said copper-focused investors should keep an eye on industrial action, the potential for a significant second wave of COVID-19, changes to US/China relations and what happens on the stockpiling front.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.