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After peaking at over $480/lb. mid-month, copper prices declined by around 6% with COMEX first position stabilizing at $440/lb. by month’s end. This was primarily due to concerns over the impact of current COVID-19 lockdowns in China and an increased likelihood of more aggressive U.S. Fed tightening.

Uncertainty has been heightened in recent weeks on two main fronts: i) the magnitude and duration of China’s current COVID-19 lockdowns in Shanghai and other key cities and ii) expectations for the Fed’s response to surging inflation and how this will impact real demand and risk appetite.

While COVID-19 cases in Shanghai appear to have already peaked, a surge in cases in Beijing late in the month reinforced concerns about an economic slowdown in China. Not surprisingly, these concerns have been reflected in more China leveraged commodities – iron ore and copper, both of which saw significant price declines late in the month. Importantly, late in the month China’s Politburo indicated its commitment to using its policy tools to ensure its full year economic goals are met. This is expected to include copper intensive stimulus measures.

At the same time, the market is pricing tighter monetary policy (U.S. Fed and other central banks) to combat surging inflation, as well as ongoing risks associated with the war in Ukraine.

Continued low stocks in a year in which we forecast a near 200,000t refined deficit, pent-up demand in China and the prospect of copper-intensive economic stimulus in China in coming months should continue to support prices above $450/lb. through the balance of this year. However, the near-term outlook is one of greater uncertainty with risks shifting to the downside.

While investors had recently been reluctant to short copper at a time of low exchange stocks, gross short speculative positions are now at a seven-month high, in line with the 2019-2022 median.

Stocks increase off lows but likely temporary

For now, visible stocks on global exchanges remain very low. While total visible stocks have increased by around 20,600t, open stocks have declined by 4,050t in April. Total visible stocks are ~270,000t below levels seen a year ago. Our forecast of an almost 200,000t deficit this year suggests stock levels are likely to remain low through the remainder of this year. There is some risk that more material temporarily ends up in exchanges, particularly given current logistics bottlenecks in China. This includes cathode from Russia, a significant net exporter (750,000 t/y) with more limited outlets for this product since the war in Ukraine started.

Supply risks remain elevated

Despite an extended period of near record high copper prices, quarterly reports by miners in recent weeks have guided the market towards the low end of expectations due to factors including the drought in Chile, lower grades, COVID-19 related labor shortages and community disruptions in Peru. Chile and Peru combined account for around 40% of mined copper supply.

Drought conditions in Chile, which saw a 7% reduction in mine output in the first two months of this year, have continued. Operations in Chile have also been impacted by truck driver strikes. This year is also seeing continued mine supply challenges in Peru. Protests by communities along the mining corridor have continued in April, impacting MMG’s Las Bambas and SPCC’s Cuajone, requiring government intervention. In China, smelter utilization rates have been impacted by logistical challenges in getting concentrates from ports to site as well as moving cathode and acid products at some facilities.

Most scrap markets remain relatively tight but less tight than two months ago. Concentrate terms have been increasing but may have found a near-term peak with signs late in the month that China’s 400,000 t/y Xiangguang smelter could restart as soon as May, following its recent bankruptcy. Concentrate markets are also likely to be supported by continued supply disruptions in South America and with less smelter maintenance scheduled for Q3.

Outlook: waiting for China recovery

While risks have shifted to the downside, we continue to expect prices to trade above $450/lb. over the remainder of this year.

China has historically met or exceeded its annual GDP growth targets, except for 2020 due to COVID-19. The impact of current lockdowns is likely to see further economic stimulus in China in the coming months, which is expected to be supportive of copper demand and prices. This, combined with pent-up demand, is expected to see a demand rebound in the second half as current lockdowns ease. We also note historically China has seen sequentially stronger quarterly cathode imports as the year progresses, which has seen 2H imports 19% higher, on average, than 1H over the past decade. This equates to around 50,000-60,000 t/month of higher imports in 2H.

With strong European and U.S. markets having supported the copper market for more than a year now, the market is now more reliant on a recovery in demand in China. However, the timing of this rebound is uncertain. The longer China’s current lockdown continues, the greater the risks current demand deferrals translate to demand destruction. It also brings copper markets closer to the point where Europe and U.S. markets are likely to be feeling the impacts of tight gas markets (Europe) on industrial output and tighter monetary conditions on economic activity more broadly.