How have copper prices fluctuated throughout COVID-19?
The rise of renewable energy has led to increasing demand for base metals, with copper known for being one of the most versatile among them. Used in several industries, copper maximizes the performance of products it is contained in, saving energy and money at the same time. However, with the global economy going into recession in March at the peak of COVID-19, the future of copper looked uncertain. So, how did it make such a swift recovery?
China’s Influence on Copper
Many regions were heavily impacted by declining copper prices, and it was the fall and recovery of China’s economy that influenced copper prices significantly. Economic activity in China collapsed in February, with the Purchasing Managers’ Index (PMI) dropping below 50. Although China’s PMI rebounded above 50 in March, declines throughout the remainder of 2020 were still forecasted by commodity analysts. The importance of such declines in the market for copper comes into play when considering China’s importance in copper consumption. China is the world’s most dominant buyer of copper and the biggest single user of refined copper. As such, the fall of China’s economy led to significantly decreased demand for copper globally. As a result, in March, copper prices fell by 8% in Asia in just one day. During this period, copper hit a four-year low, and was on course for its worst weekly performance since the 2008 financial crisis.
Copper and the Return of China’s Economic Growth
The effect of China’s declining economy on copper prices was further compounded by their mixed market economy making it difficult for the Chinese government to set base rates. This meant that copper prices continued to fall. Furthermore, the spread of COVID-19 outside of China led to a demand shock, causing the copper industry to lose money at current prices at the time. With such a drastic decline in copper prices, initial projections in March saw copper prices decreasing even further throughout 2020.
However, the opposite occurred as China’s recovery at the end of March saw the launch of stimulus packages to support economic growth. This was especially promising in commodity markets, especially with regards to copper and other base metals. As a result, a demand recovery occurred following declining inventory and China’s lifting of lockdowns.
What This Means for the Future of Copper
Copper’s recovery demonstrates the promise of commodity analysts’ predictions that COVID-19 is a new and short-term reality, simply being the downswing of a cycle. While the height of the pandemic saw falling demand driving copper prices downward, China’s investment in renewables and the environment as their economy recovered looks to be the beginning of a boom in copper demand. This can also largely be attributed to green stimulus programs in Asia and Europe encouraging the switch to electric vehicles, 5G networks, and renewable power. The rise of renewables also should benefit copper in the long run by being sustainable and competitive on a cost basis relative to conventional carbon-based fuel options. The collapse of oil prices and the low cost of carbon-based energy sources may lead to demand for copper being lower in the short run, as a partial switch away from renewables to conventional forms of energy is currently occurring. However, it will be risky for countries to make a permanent shift from renewables back to conventional forms of energy in the long run, signalling optimism for copper prices.
How Sustained Global Growth for Copper Can Occur
A sustained lift in copper demand and prices can be delivered by several scenarios. Central banks can cushion the blow of COVID-19 by cutting interest rates to flood the market with cash and stimulate an economic response. This has already been done by the US Federal Reserve System to boost liquidity, the European Central Bank through asset purchases, and the Bank of England by reducing the base rate, expanding operations, and introducing liquidity measures in the short run. China could prompt another materials-intensive growth cycle to underpin broader growth, such as by continuing to invest in renewables and the green economy.
As other countries continue to come out of lockdown, copper demand will continue to pick up worldwide. Additional policy changes in Asia and Europe for green investments, especially shifts in transportation to electric vehicles, would ensure further growth for copper in the long run.
By Stephanie Kannimmel - BSc PPE Student at King's College London
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