Demand rises while supply falls
China's manufacturing and construction industries consume about half of the world's copper. China's two industries halted production in early 2020 because of the COVID-19 epidemic, but they have now recovered strongly, with factory activity growing at its fastest pace since December in June.
China's imports of unwrought copper rose 50 per cent in June from a month earlier to a record 656483 tonnes, more than double the amount imported in the same period in 2019. Despite being disrupted by the COVID-19 epidemic, China's total copper imports reached 2.84 million tonnes in the first six months of 2020, up 25 per cent from a year earlier.
Copper prices are also supported by supply factors. The COVID-19 epidemic continues to run rampant in Chile and Peru, the world's largest copper producers. Peru's copper production fell 42 per cent in may, while Chilean state-owned copper miner Codelco temporarily closed its largest smelter and refinery and suspended construction of its flagship mine.
Manufacturing and infrastructure are the main areas of consumption
China's strong demand for copper is expected to continue, driven by government stimulus measures. To help manufacturers recover from the COVID-19 epidemic, the Chinese government has granted tax breaks to manufacturers and lowered lending rates.
The 2020 report on the work of the Chinese government pointed out that we should further improve the efficiency of the allocation and use of financial resources, and accurately support key areas such as reducing taxes and fees, reducing rents and interest rates, expanding consumption, advanced manufacturing, people's livelihood construction, and infrastructure investment, so as to provide funds for the implementation of the "six guarantees" task. China will issue 3.75 trillion yuan worth of special bonds to finance infrastructure projects in 2020, an increase of 1.6 trillion yuan over 2019. Manufacturing and infrastructure are the main areas of copper consumption.
Copper has long played an important role in China's economy. China is currently the world's largest importer of copper, accounting for 43 per cent of global copper imports, more than three times that of Japan, which ranks second.
The use of copper in China is driven by the fact that it is used as a raw material for manufacturing and construction owners, and some of the measures being taken by the Chinese government are expected to further increase demand for copper.
Demand for renewable energy may surge
China's shift to renewable energy systems is likely to be a major driver of copper demand in the future. Copper is the best non-precious metal conductor because of its low resistance. This characteristic makes it an important part of energy-saving generators and renewable energy systems, and solar and wind energy devices use more copper than traditional thermal power units.
Global demand for copper in solar and wind energy systems is expected to increase by 56 per cent by 2027 compared with 2018, according to research by (ICA), the international copper association. Although ICA does not provide individual country data, it predicts that China will continue to dominate the annual installation of wind turbines.
Subsidies for new offshore and onshore wind farm projects will end sometime in 2020 and 2021, respectively, and the advance of the project will lead to a surge in demand for copper in the short term, according to China's National Energy Administration.
More areas will increase consumption
Electric car production is also expected to boost copper consumption in China. Copper is an important part of electric vehicles, which is used in electric motor battery, winding, copper rotor, wire laying and charging infrastructure. The average copper consumption of an ordinary electric vehicle is 83 kilograms, almost four times that of a conventional car.
Sales of electric vehicles in China have been sluggish in recent months, affected by the novel coronavirus epidemic and reduced government subsidies. But as part of made in China 2025, China is confident of becoming a leading center for electric vehicle manufacturing by 2025. The move will further support copper demand.
In fact, the Chinese government has put forward the "made in China 2025" plan, which aims to improve China's manufacturing process and produce higher-value products. This has a profound impact on copper. More efficient equipment tends to use more copper. According to ICA, the made in China 2025 program is expected to increase China's copper use by 232000 tons by 2025.
Copper consumption is expected to increase in many areas, including efficient industrial motors and distribution transformers, the electrification of new railways and industrial new energy vehicles.
The position of COMEX copper futures has changed.
Affected by the rebound in copper prices, the position of COMEX copper futures has changed from a large net short position to a huge net long position. In the medium to long term, the importance of copper in the Chinese economy will support copper prices.
As the world gets rid of the novel coronavirus epidemic and China's demand for copper increases, market participants' demand for copper exposure will become stronger, and global economic growth can be judged by the wide range of uses and unique demand patterns of copper.
(the writer is the Senior Director of Metal products of Zhi Merchants Institute)
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