Given copper’s wide range of use in almost everything—from automobiles to housing and power generation to manufacturing—its demand trends are a good indication of the state of the global economy.
Notwithstanding the worries about the state of the global economy, copper is up by around 8 percent in dollar terms in the current calendar year. Leading equity indices of the western world like US Dow Jones Industrial Average index and German DAX index are also up sharply in 2019 and a tear-away rally is underway in China.
A promising start in the new year, however, part of the buoyancy in commodities and global equities in 2019 may be due to corrective rallies from 2018 lows. We may have to wait for some while for the volatility to subside and the long-term fundamentals to exert themselves on prices.
Copper fundamentals are underpinned by ageing mines and growing demand that may result in modest deficits in 2019 and 2020. China, which accounts for almost half of the global demand, slowing down is a worry and a sharper than expected de-acceleration of its economy can impact copper fundamentals negatively.
Environmental issues have come to the fore in the global metals and minerals industry. Vale disaster is a grim reminder of the damage inflicted by miners and smelters on the environment. Closer to home, Vedanta had to suspend production at its 4,00,000 tpa copper smelter in Tamil Nadu due to environmental concerns. The time required to build a similar greenfield smelting capacity is around 2-3 years, assuming environmental clearances are in place.
If the future is electric, then copper may be a good proxy to participate in the electric vehicle (EV) story. Electric vehicles consume around six times more copper than internal combustion engine vehicles. Almost three million tons of copper is consumed in the transportation sector each year worldwide; a strong push towards electric vehicles in the coming years may result in copper demand outstripping supply by a sizeable margin.
The copper market remains tight for now as visible copper stocks are at historic lows. London Metal Exchange (LME) copper stocks are at an almost ten-year low. Chinese economic data holds the key for copper prices ahead. If current up move in the metal alludes to the Chinese economy bottoming out, then the copper bull run may have a long way to go.
The author is Head Commodities at Reliance Nippon Life Asset Management.
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