“But while a little counterintuitive, this idea isn’t as farfetched as it first appears. After all, absent the pandemic, policymakers in China wouldn’t be embarking on an infrastructure spending splurge,” he said.
Clancy suspects that a significant amount of supply disruption is already priced into the copper market.
“So if those supply disruptions fail to materialize (or are lower than expected), that poses a downside risk to the copper price,” he said. In fact, supply has been relatively resilient so far this year, which has been somewhat surprising, according to the expert.
“Compared to other base metals, mined copper supply has held up reasonably well, thanks to a surge in Chinese output of copper ore,” Clancy said. “However, with virus numbers in Latin America now climbing rapidly, we think there is significant risk to supply in Q3.”
Looking over to demand, copper demand recovered quicker than many expected in Q2.
“This is almost entirely due to a remarkable bounce-back in Chinese demand, as policymakers there moved to stimulate activity — particularly in the copper-intensive infrastructure sector,” Clancy said. “And with that support set to be stepped up in the months ahead, a further pick-up in Chinese demand will probably remain the key driver in the second half of the year.”
He added that a pick-up in demand outside China will probably be an additional positive at the margin.
But, despite the surge seen in prices in the last three months, the past week has seen investors fly to safe haven assets such as gold and silver as fears of a second wave of COVID-19 increase.
