Financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research (Fitch Solutions) has maintained its forecast for copper prices at an average of $5 900/t as it expects its previous expectation of stimulus from the Chinese government to play out and for global economic activity to increase.

Copper prices have already rebounded strongly following the Covid-19-induced drop recorded in the first quarter of the year.

However, Fitch Solutions expects the market to tighten further as economic activity recovers and pushes the average price above current levels for the remainder of the year.

Copper prices fell to multiyear lows in March as Covid-19-related lockdowns in major economies around the world weighed on copper demand and led to substantial risk-off sentiment among investors. Since then, Fitch notes that prices have recovered by over 20% as fundamentals tightened as a result of increasing demand in China and a rapid drawdown of global copper inventories.

This led to an increasingly bullish stance among investors, which has offered an additional tailwind to prices, bringing the year-to-date copper price average to $5 492/t as of June 23.

Further, Fitch Solutions points out that a broader uptick in global economic activity will bolster copper demand and support general investor sentiment in the market, supporting prices in the coming quarters.

Regarding physical demand for copper, the company points to the reopening from lockdowns and the recovery of economic activity, especially within the manufacturing and heavy industrial sectors from the low base experienced over the first half of this year, tightening copper fundamentals further.

Thus, the firm expects a further upside to prices beyond the current rally.

The more bullish investor sentiment, evidenced by rising net speculative positions on both the London Metal Exchange (LME) and Comex since March, is another supportive sign for prices to continue on their upward trend, states Fitch Solutions.

Moreover, it notes that China’s recovery has in fact already been tangible, and the firm expects this to continue, with stimulus from the government to "energise" demand for copper. In particular, Beijing is targeting support for the construction sector through a 75% increase in local government special bonds to ¥3.8-trillion and the issuance of ¥1-trillion worth of central government special bonds announced in May.

Fitch expects positive growth in key sectors within China to underpin support for copper demand in the coming quarters, leading to the firm revising up its growth forecast for China’s copper consumption from a contraction of 1.5% year-on-year to 0% year-on-year growth in 2020 with notable upside risks. Therefore, Fitch expects that there is still room for the market to tighten further.

LONG-TERM OUTLOOK

For 2021, Fitch Solutions forecasts copper prices to tick higher as increasing consumption growth pushes the market back into a deficit. Following what it expects will be a mediocre year for consumption growth in 2020, held back by the Covid-19 pandemic, Fitch expects 2021 will fare much better as there is likely to be less disruption.

The continued recovery of economic growth alongside growth in vehicle production, transmission infrastructure and manufacturing will underpin demand for copper.

Overall, Fitch Solutions forecasts copper consumption will grow by 1.8% year-on-year in 2021, outpacing production growth of 1.2% year-on-year in 2021, contributing to prices increasing to an estimated average of $6 100/t.

Over the long term, Fitch Solutions expects the copper market to remain in a market deficit as consumption growth recovers, driving prices higher over the coming years.