Pandemic unleashes a copper rally
The International Monetary Fund (IMF) estimates the damage caused by the coronavirus to the world economy to be greater than initially thought. The expected contraction for this year was adjusted by the fund from 3 to 4.9 percent. According to the IMF, the recovery in 2021 will also be slower than previously expected. Meanwhile, concerns about the sustainability of the trade agreement between the United States and China are increasing again. On top of that, the United States yesterday announced the largest number of new virus infections since the start of the pandemic. In Texas, California and Florida, the number of new infections reached a record. It just put a brake on the reopening of the economy in several states. The stock markets reacted not amused. The S&P 500 fell by 2.5 percent.
After a series of better-than-expected macro-economic figures, the optimistic sentiment on the stock markets took a turn for the worse. Has the rally been over since the bottom of March? It doesn’t have to be. The copper price speaks a different language. The price of copper has been in the bull market for some time now and has already risen by 27 percent since the infamous March bottom. The copper price is usually followed with suspicion in the market. Copper is seen worldwide as a good indicator of confidence in the global economy. Indeed, due to its many industrial applications, copper has even considered the best indicator. At the stock exchange, people jokingly talk about Dr. Copper with a PhD in economics.
Main industrial metal
Copper is used in building constructions and piping. The metal is used for generators, video cards, water pipes and buildings. But also building electric vehicles, rolling out 5G and renewable energy requires large amounts of the red metal. Copper is the world’s most important industrial metal. The fact that the emerging economic power China is the largest consumer of the metal with consumption of half of the world’s entire production is even more indicative of the importance of copper. After all, China is still the world’s workshop.
In anticipation of the corona crisis, copper once again lived up to its name as a good predictor of the economy. In mid-January, the price of copper reached its peak for this year at $6300 per tonne on the London Metal Exchange, the world’s leading copper exchange. By the beginning of February, however, the price had dropped by 12 percent. There was still no sign of a corona outbreak on the stock exchanges, but the price of copper spoke a different language. Subsequently, the price of copper went along with the fall of all financial markets to set a bottom in March at a price of 4617 dollars. Since then, the copper price has been on the rise again.
Era of Copper
The world’s largest copper trader Trafigura is more bullish than ever. The virus has forced copper mines — many of which are in South America — to reduce their production. On the other hand, demand for copper is starting to rise again. For example, it was found that the new orders were not just a question of catching up, but were much larger. Several countries doubled their investments in red metal. It is estimated that demand will increase by 3.4 per cent a year over the next decade. It will increase the price significantly unless new sources of copper are found. The pandemic is called the starting shot for an “Era of Copper”.
The large-scale government-supported green and digital stimulation programmes will drive a boom in demand for copper. Global investments in infrastructure — particularly in China — will also contribute to the demand for copper. The production of electric vehicles alone — now accounting for one percent of global copper demand — could soon account for 10 percent of total copper purchases. But, as already mentioned, the digitisation and greening of the economy will also promote the use of copper. Indeed: “Welcome to the copper era”. The price of copper is a “hard” indicator that should be taken seriously given its reputation as a predictor.