Copper analysts reset outlook on double swings in demand in China

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(Reuters) – Copper analysts are revising their price forecasts for the red metal after simultaneous disruptions in two key sectors in China that together account for more than half of the country’s copper demand.

FILE PHOTO: An employee works at a power cable factory in Baoying, Jiangsu province, China, July 23, 2006. REUTERS / Aly Song / File Photo

The collapse of a major Chinese real estate developer that triggered debt concerns for the construction industry and a coal shortage that cut off manufacturers’ electricity supplies are mounting as downside factors for copper at short term, analysts say.

China is the world’s largest user of copper, accounting for around 50% of global consumption, so a shift in the balance of its copper market has global repercussions.

Forecasts of strong demand for copper as part of the global energy transition for everything from charging stations to solar power plants can potentially offset this unfavorable short-term outlook. Copper consumption by green energy sectors around the world is expected to quintuple by 2030, according to data from consulting firm CRU Group.

“Short-term bearish, long-term bullish is certainly a good way to sum it up. Long-term demand dynamics are great. But short-term cyclical demand is clearly a concern,” said Colin Hamilton, Managing Director of BMO Capital Markets.

(GRAPH: Price of copper -)

Benchmark three-month LME copper prices have been largely stuck in a narrow $ 9,000 to $ 10,000 per tonne range over the past four months, but Hamilton sees them drop by about $ 1,000 per tonne. ton as of now, or more than 10%, due to short-term use in China.

“I would probably be more in the $ 8,000 camp than $ 9,000,” he said.

DOUBLE WHAMMY

Once the best-selling developer in China, China Evergrande Group faces one of the country’s largest debt restructurings with more than $ 300 billion in liabilities.

The possible collapse of such a prestigious builder and borrower has raised fears of contagion here to the rest of China’s vast real estate sector, a huge consumer of copper that could be hampered by any lasting credit crunch.

At the same time, prolonged power outages in China here have raised uncertainties about how much manufacturing constraints will be and for how long, after the unexpected drop in factory activity in September.

Machinery, air conditioning, refrigerators and other consumer durables combined account for 42% of end use of copper in China and construction accounts for 22%, according to CRU data, while electricity accounts for 22%. and transport 8%.

(GRAPH: Breakdown of copper consumption -)

“Weakening construction, crunching credit, the Evergrande crisis and a power shortage in China are key headwinds for copper prices,” said ANZ analyst Soni Kumari.

Citi analysts recently lowered their copper price forecast to $ 8,200 per tonne for the next three months, from $ 8,800 previously, and to $ 8,600 for the first quarter of 2022 from $ 9,000.

BUY THE DIP?

While most analysts agree on the weaker short-term demand outlook, some are still waiting for evidence of reductions in consumption before adjusting the forecast.

“To corroborate the idea of ​​a destruction of copper demand (by the power cut), we will have to wait for more data and evidence after the holiday market returns,” said ING analyst Wenyu Yao, referring to China from October 1-7. Week break.

China’s tight copper stocks are also offsetting the broader macroeconomic picture, limiting market pessimism.

(GRAPHIC: Visible inventories of copper -)

Shanghai Futures Exchange warehouse stocks have fallen about 80% since May to their lowest level since June 2009, bringing “visible” stocks, which include stocks in LME and Chinese bonded warehouses, at an all time high, according to data from Refinitiv Eikon.

“What is clear to investors is the multi-year low stocks in the onshore market that are part of the micro positivity,” Yao said.

(GRAPH: ShFE copper inventory seasonality graph -)

Indeed, any short-term collapse in copper prices will likely be seen by some as a buying opportunity rather than a signal of continued market weakness.

ANZ predicts copper will hit $ 10,000 per tonne by the end of 2021, while ING predicts fourth quarter average prices of $ 9,200.

“We still strongly believe in a copper super-cycle, and we see copper present a strong buying opportunity for medium to long-term investors over the next 3-6 months,” Citi analysts said.

Report by Mai Nguyen in Hanoi; Editing by Gavin Maguire and Richard Pullin


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