Commodity Investment – Copper demand and supply trends

The Central banks' announcements and government policies influence the trade of commodities. The ECB recently hinted towards a rate cut that stimulated the slowing economy in the EU. 

The bank has downgraded inflation expectations and growth over such announcements. Commodities like base metals and copper fluctuated during the trade war over failing policy-related meetings and the speculation of a global slowdown. 

Copper prices remained in a tight range in the second week of June over the trade issue between Washington and Beijing. Donald Trump defended the tariffs, and China vowed a tough response. 

Commodities and industrial metals faced multiple volatilities. At the London Metal Exchange, copper was down 0.2 per cent, aluminium increased 0.3 per cent, lead dropped 0.4 per cent, and zinc was up 0.3 per cent. 

Factory gate inflation in China was slow, reducing inflation and lowering commodity demand, resulting in lower manufacturing activities in the last few months.  

Canada, the US, and Australia are getting together to help countries develop reserves like lithium, cobalt, and copper to lower dependence on China, which is preparing to launch a survey of rare earth resources in its seven regions to curb trade issues with the US. 

The issues between the two countries, even if tackled, will create a long-term impact as it is difficult to see an immediate de-escalation of tension. Hence, investors do not expect an immediate copper rally.   

• In the previous Cold War days, China benefited from global tensions and retained a global manufacturing hub position. 

• The open economy of China promoted rapid capital accumulation and created a standard growth model, but overall, the demographic dividend is lowering. 

• In the last few years, a slowdown can be seen in retail sales, real estate investment, and export growth that will affect copper demand and create pressure for the red metal. 

• Another sector that can generate demand for copper is transportation, which was hit by wide electrification and grid spending for promoting greener capacity. 

• However, some analysts say the area has already peaked and may create a metal demand contraction. 

The demand, if considered through the macroeconomic backdrop of China, poses severe challenges where the country's industrial output declined unexpectedly in May 2019 to an almost 17-year low, indicating a cooling in investment and weakening overall demand for the base metals. Still, there are other regions where its demand can increase, like India and South East Asia. 

With the weak data for copper, the prices were down in the last few weeks, especially when the manufacturing and investment data from the lead consumer of the metal was weak, reinforcing the decline in growth and demand prospects created by the US-China trade war. 

Further, the stronger dollar undermined commodities where the Dollar-denominated metals got expensive. However, the recent positive reports related to growth in AC sales in China may support prices and prevent a decline.