All is not bearish with copper, says analyst

Global demand for copper has taken a measurable hit with China’s construction slowdown, but continued demand for the red metal in other applications may soon offer renewed price support.

That is the underlying observation by Reuters columnist Andy Home, who analyzes metals for the news service and diagnoses the state of the red metal in the personification of “Dr. Copper.”

Home says the current narrative on copper as its price has fallen can be summarized as, “Demand growth has all but evaporated, thanks first and foremost to China,” and that China’s shift away from infrastructure and apartment tower construction “happened just as copper producers were unleashing a wave of new production to meet demand growth that is no longer there, swamping the world in surplus material.”

But Home says that further analysis points to supply, demand and inventory factors that do not fit neatly into this bearish narrative, including:

• if Chinese demand growth really has evaporated, why did the country import record amounts of the red metal in 2015, Home asks;
• if the world “is sinking” in surplus copper, he also asks, why is it not reflected in London Metal Exchange inventories, which as of January 2016 are “hovering around one-year lows”; and
• on the supply side, 2016 smelter deliveries are not forecast to exceed potential global demand, and Home describes global copper mining conditions as being characterized by “continuous downgrading of mine supply growth.”

The columnist acknowledges the drop in China’s red metal scrap imports and some price-bolstering finished copper purchases by China’s State Reserves Bureau, but he questions whether these actions will have a long-lasting effect on the copper price.

Horne writes that copper’s “hard landing” came in early 2015, “when Beijing called time on the property and infrastructure binge that has characterized Chinese growth over the last few years.”

He says China’s shift toward economic growth more reliant on consumer spending (as in the U.S. or Western Europe), “has laid waste to those markets, such as iron and steel, that were most dependent on that binge. Copper has not been immune, but it is the nature of the metal that it has multiple usage profiles, not all of them in construction. Growth has slowed, but it has not evaporated, and even slower growth is coming from a larger base,” meaning demand for copper in China or around the world will not necessarily spike downward.

The market’s bearishness toward copper, if Home’s analysis is correct, may have already peaked.