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Trade war potentially a blip on short-term copper demand

Despite the escalating trade war between the US and China ongoing, copper fundamentals remain constructive, with demand in China steady and treatment and refining charges declining, an assessment by Bank of America Merrill Lynch shows.
Trade war potentially a blip on short-term copper demand Trade war potentially a blip on short-term copper demand Trade war potentially a blip on short-term copper demand Trade war potentially a blip on short-term copper demand Trade war potentially a blip on short-term copper demand

Copper fundamentals remain constructive, with demand in China steady and treatment and refining charges declining

However, analysts at the bank's global research team said neither LME quotations nor physical premia have reflected that.

"In our view, the trade dispute is the key culprit, compounding the negative impact the ongoing rebalancing of China's economy has had on growth," the bank said in its Global Metals Weekly report.

"The trade dispute has many strategic elements. These may not be tackled comprehensively in a single trade agreement, suggesting that some friction between the US and China will remain an issue in the medium term.

"That said, de-escalation is possible, but until that materialises, sustained copper rallies are unlikely," BofAML said.

The bank said the degree of economic openness had tended to correlate with the strength of global economic growth. The two metrics have shown the most persistent relationship between 1991 and 2007 after the Cold War ended and during the heydays of globalisation.

The analysts said China was a key beneficiary and became a global manufacturing centre during that period.

"This is a key reason world trade has correlated so closely with copper prices since 2001. That said, the global economy also expanded during periods when integration and trade were not the key drivers. Indeed, we believe that countries including China will have to focus more on the domestic economy going forward," the bank said.

"This is to some extent already reflected in the degree of economic openness going into reverse since 2010."

This shift will have implications for commodity demand. Referencing a standard growth model, China's capital accumulation, which had been partially driven by an opening up of the economy, is slowing.

Similarly, the country's demographic dividend is declining and productivity improvements are not necessarily helped by issues including the contentious knowledge transfers.

"All of this has been mirrored by a slowdown of fixed asset investment, retail sales and export growth. The headwinds are also picked up by one of our cyclical copper demand analysis, which runs on the three variables above and suggests that consumption growth of the red metal should remain subdued," BofAML said.

Beyond that, BofAML has estimated potential copper demand growth out to 2040, looking at individual sectors. Results suggest offtake should continue to expand at low-single-digits rates going forward.

Transportation is key behind that dynamic, with rising vehicle sales and electrification set to boost offtake.

Similarly, grid spending should expand as new and greener capacity is being built. Housing remains a concern and there is strong evidence that the segment may have peaked.

"We don't expect a sustained contraction of copper demand medium term, but the mining industry needs to remain disciplined not to push the global market into surplus.

"With Chinese copper demand set to be more subdued going forward, we believe that scope for sustained rallies in the red metal is limited if the macro-economic backdrop is as challenging as at present, unless a new structural growth driver is coming to the fore. India and South East Asia are candidates, but have so far underperformed.