In a 2021 report released last week, Wenyu Yao, senior commodity strategist at ING, predicted a synchronised recovery in copper demand in China and other economies next year. After the outbreak, the focus of the global economy began to turn to "green recovery" , energy-related copper demand will speed up. Given the bullish demand narrative and the favourable macro environment, market risk tends to be on the upside.

1.Strong recovery of copper market after new crown impact

Copper prices on the London Metal Exchange have rebounded sharply in the wake of the new crown pneumonia outbreak, helped by a strong recovery in Chinese demand and a weaker dollar. On the supply side, although the shutdown caused by the new crown disease was mainly in Latin America——Production in Chile, the world's largest copper producer, is expected to grow modestly this year. Overall, global copper supply will fall 2 per cent in 2020 from a year earlier, but will resume growth of 3.1 per cent next year. At 2021, the shutdown rate is expected to remain well above its long term average, largely because of uncertainty over employment contract renewals. At the same time, demand from smelters is strong and the refined copper market remains tight, in the form of a reduction in the cost of refining (TC/RCS) to an eight-year low of $50 per tonne, compared with a benchmark price of $62 in 2020.

China's import restrictions on scrap copper and the impact of the epidemic, the market further tightened. China's imports of scrap copper fell 50 percent in the first 10 months of 2020 compared with the same period last year, according to Chinese customs data, as a shortage of scrap copper supplies has strained the supply side of the market. In October, however, China announced a new customs code for the import of high-quality scrap copper. In other words, from November 1,2020, the import of scrap copper meeting the new standards will be unrestricted. Imports of higher grade copper are expected to grow from this year's lows after the new rules, but it may take some time for market participants to adjust to them.

 demand recovery China's strong imports

The main drivers of the recovery in copper demand have been a rapid recovery in Chinese demand and government-led investment in metal-intensive industries in the post-epidemic period. Actual copper demand is driven by both traditional old infrastructure projects and new infrastructure projects.

The rapid recovery in other sectors such as real estate and autos since the second quarter of 2020 has also driven up copper consumption, as has the recovery in imports of copper-intensive end products such as air conditioners and refrigerators. In addition, China's strong copper imports expanded apparent demand -- as much as 10 percent in 2020 -- absorbing excess supply from overseas markets. In the first 10 months of this year, China's imports of unwrought copper rose 41 per cent year on year to 4M tonnes, driven by positive arbitrage by the State Reserve Bureau and possible purchases.

3.A "green" renaissance will set the stage for copper demand

Looking ahead, copper demand in China and other economies will recover in tandem. The demand-side bullish narrative comes from the energy transformation. In the post-epidemic era, the centre of gravity of the global economy will shift to "green recovery" . Some major economies are increasing the share of electricity generated from renewable sources, while the penetration of new energy vehicles is increasing. Based on existing government plans, we expect double-digit growth over the next five years in green investment that will induce copper demand.

China's recently released new energy vehicle industry development plan (2021-2035) shows that the Market penetration of new energy vehicles will increase to 20% by 2025. Growth in new energy vehicles and the building of charging infrastructure will boost copper demand. In Europe, the green new deal is expected to increase demand for more than 800 kilotons of copper over the next seven years, according to BNEF forecasts. The plan will focus on incentives to install electric vehicles and charging infrastructure, renovate buildings to increase energy efficiency, and support wind and solar power. Globally, many countries have pledged to be carbon neutral by 2050, reinforcing expectations of strong future growth in copper demand.

4.Copper Price Forecast

Global reportable copper inventories -- exchanges plus Chinese bonded areas -- are down about 25 per cent from the beginning of the year and remain at historic lows. The refined copper market is expected to be relatively balanced at 2021, with a slight overhang. Given that mine shutdowns next year will remain above their long-term averages, adding to expectations of a synchronised recovery in global demand, copper's fundamentals are likely to remain constructive. Copper has rebounded 64% from its march low of $4,630 a tonne, and much of the bullish narrative has been absorbed by the rally. However, maintaining the current upward trend will require a favourable macro environment and further depreciation of the dollar. The average price of 2021 copper for three months on the LME is expected to be $7,400 a tonne.

Source: NAI500