Copper Market Update

LONDON (Reuters) – Copper has rallied this week as China’s pledged stimulus package has revived investor enthusiasm.

Renewed optimism about the world’s largest copper buyer recovering its manufacturing momentum has pushed the London Metal Exchange (LME) three-month copper prices above the $10,000-per metric ton level for the first time since July.

This positive macro sentiment aligns with a decrease in Shanghai copper stocks in recent weeks.

Supply and Demand Outlook

However, copper bulls may be overly optimistic. The International Copper Study Group (ICSG) has reported a substantial copper supply surplus. They anticipate a global supply surplus of 469,000 tons for this year and another 194,000 tons in 2025, which is over double the surplus forecast made in April.

Methodology Concerns

The ICSG’s forecasts come with caveats, notably that their demand calculations are based only on reported data like stock levels and trade flows. This approach does not account for shifts in strategic inventories, which significantly influence the market balance.

Production Growth

The surplus forecasts are primarily due to supply side changes. Expected copper mine production growth of 1.7% in 2024 is an upgrade from the 0.5% forecast in April. This growth rate is expected to accelerate to 3.5% next year as major mines like Kamoa-Kakula in Congo and Oyu Tolgoi in Mongolia ramp up.

Refined metal production is now forecasted to grow by 4.2% this year, up from April’s forecast of 2.8%.

Market Challenges

The gap between mine production and smelter growth is straining the raw materials segment. Spot treatment charges by smelters are close to zero, indicating pressure but also reflecting aggressive expansions in smelting capacity, particularly in China.

Despite calls for restraint from top Chinese producers, production has continued to increase, with a 6.2% year-on-year rise in refined metal outputs for the first eight months of 2024.

Global Inventory Trends

While there is apparent tightness in raw materials, there is no copper shortage. Global exchange stocks reached a four-year high of 599,000 tons by the end of August and remain significantly higher than at the start of 2024, despite recent declines.

Regional issues, rather than global scarcity, have masked the surplus. Increased Chinese exports and rising global stocks, particularly at the CME, contribute to a clearer picture of supply.

Demand Outlook

This week’s price rally is based on renewed optimism regarding China’s copper demand, although the ICSG maintains forecasts of modest growth in Chinese copper usage of 2.0% for this year and 1.8% in 2025. Global demand growth of 2.2% is expected to lag refined production growth, leading to a metal glut.

Despite the LME price jump, there hasn’t been a corresponding movement in forward spreads, indicating a market perception that copper scarcity is not imminent.

Funds previously surged into the copper market but decreased their presence in Q3 as Chinese exports rose, indicating that warning signs about scarcity were disregarded. Current trends could lead to a repeat of this behavior during the recent rally.

Opinions expressed here are those of the author, a column from Reuters.