The opinions expressed in this report are those of CRU Group and are considered market commentary. They are not intended to act as investment recommendations. Full disclaimers are available at the end of this report.

We have lowered our 2022 China refined copper consumption growth estimate from 2.1% to 1.3%, with the reduction somewhat limited by continued tight scrap availability. China’s copper demand growth so far this year has fallen short of expectations due to Covid-19 lockdowns and a deeper than expected contraction in the property sector. However, we note China’s credit cycle now appears to be turning, which has historically been followed by a recovery in copper prices.

For now, markets are yet to see much real evidence of the impact of recent policy changes, or the hoped-for demand rebound following recent Covid-19 lockdowns in Shanghai. China Q2 real GDP was flat (0.4%YoY) on the back of lockdowns. July data releases for June activity saw improvement consistent with a moderate recovery. Refined copper imports in June were strong at 374,690 tonnes, up 35% y/y, with first-half imports up 4.3% y/y.

It has been reported that China has given the green light to provincial governments to boost spending, bringing forward 1.5 trillion yuan ($220 bn) of Special Purpose Bonds (SPB) issuance from 2023 to the current half. This is to fast track infrastructure projects and help reverse the current economic slowdown. While China can boost its economy through infrastructure-focused stimulus spending, domestic consumers will need to pick up the slack from lower exports of manufactured goods to the rest of the world, which account for around 30% of China’s apparent consumption of copper cathode.

After seeing a modest increase in June, global copper stocks resumed their seasonal decline, down 74,655 t (-12%) m/m in July, driven by a 69,270 t (-17%) decline in visible inventories in China with the import arbitrage opening mid-month and again late in the month. A further decline in global copper inventories has occurred in the early days of August.

US Comex inventories declined by 11,461 t in July, while European stocks fell by 5,600 t. There has been limited movement in European stocks in the last 6 months as we understand much of the inventory is Russian origin cathode, which many consumers are unwilling to take given sanctions and related financing risks.

Production guidance for mines continues to see downgrades. Late in July, Glencore cut its full year copper guidance by 50,000 t to 1.06 Mt, reflecting technical constraints at its Katanga operation in the DRC and Covid-19 related production effects at its Mt Isa operation. Vale and Lundin Mining also cut guidance. Vale is now expecting output of 270,000-285,000 t from 330,000-355,000 t previously, citing extended maintenance. Lundin Mining lowered production expectations by 8,000t to between 45,000 t and 50,000 t. 

Antofagasta’s Los Pelambres mine returned to normal production this month after concentrate pipeline repairs were completed in late June. Similarly, MMG’s Las Bambas resumed shipments at the end of last month, with recent elevated community unrest in Peru easing, at least for now. However, community leaders have emerged from a 30-day truce indicating they have yet to reach an acceptable agreement.

It remains to be seen whether the recovery in risk appetite since mid-July represents the low point for markets, or a bear market rally. From the perspective of the fundamentals, the near-term demand outlook is likely to continue to soften and macro headwinds are likely to continue to build. However, recent major downturns have shown copper prices are more influenced by the (12 month) forward outlook and commence their recovery ahead of real demand bottoming out. Consistent with this is the fact that although economic indicators such as consumer sentiment are already at or near the lows of previous recessions, this has historically coincided with copper price floors. In addition, China’s credit cycle appears to be turning and an infrastructure led recovery is expected to benefit demand in the world’s largest copper consuming country in H2 2022, albeit this appears likely to be more weighted to later in Q3 and Q4.

However, price risks remain elevated in both directions, particularly with visible inventories still at very low levels. If global recession concerns once again become the dominant driver of sentiment and prices, cost support indicates copper prices could fall.. If global recession concerns moderate and risk appetite continues to recover, we expect copper prices to continue their recent ascent with green energy secular demand drivers intact and continued supply-side challenges over the medium to longer term. The latter scenario is more consistent with our base case which sees copper prices recovering by year-end.