The basic logic of copper demand in 2021

In a 2021 outlook, Wenyu Yao, senior commodities strategist at ING, predicted a 'synchronised recovery' in copper demand in China and other economies.

Demand for copper related to the energy transition will accelerate as the focus of the global economy shifts to a "green recovery" after the outbreak. Market risks are skewed to the upside given the bullish demand narrative and the favourable macro environment.

New crown after the impact of copper market strong recovery

In the wake of the Covid-19 outbreak, copper prices on the London Metal Exchange have rebounded sharply on the back of a strong recovery in Chinese demand and a weaker US dollar.

On the supply side, Chile, the world's largest copper producer, is on track to see modest output growth in 2020 as production continues to resume, although production shutdowns caused by the new pandemic, mainly in Latin America, are still not fully over.

Overall, global copper supply will fall by 2 percent year on year in 2020, but resume growth by 3.1 per cent in 2021. In 2021, the discontinuation rate is expected to continue to be well above the long-term average, mainly due to uncertainty over labor contract renewals. 

At the same time, demand from metallurgical plants is strong and the refined copper market remains tight, as reflected in processing and refining charges (TC/ RCS) falling to an eight-year low of $50 / mt, compared with a 2020 benchmark price of $62.

China's restrictions on imports of scrap copper and the outbreak have further tightened the market. China's imports of copper scrap in the first 10 months of 2020 fell 50 percent from a year earlier, according to customs data, and the shortage of copper scrap supplies is tightening the market. However, in October 2020, China issued a new customs code for imports of high-quality scrap copper.

That means there will be no restrictions on imports of scrap copper that meet the new standards from November 1, 2020. China's imports of scrap copper in higher grades are expected to grow from a low in 2020 following the new rules, but it may take some time for market participants to get used to the new rules.

Demand recovery plus strong imports from China

The main drivers of the recovery in copper demand have been the rapid recovery in Chinese demand and post-epidemic state-led investment in metal-intensive industries. Actual copper demand is being driven by both traditional old and new infrastructure projects.

Rapid recovery in other sectors, such as real estate and autos, has also driven the rise in copper consumption since the second quarter of 2020, while imports of copper-intensive end products such as air conditioners and refrigerators have also played a positive role.

In addition, China's strong copper imports have boosted apparent demand -- by 10 percent in 2020 -- which has soaked up excess supply in overseas markets. In the first 10 months of the year, China's imports of unwrought copper rose 41 percent year-on-year to 4m tonnes, driven by positive arbitrage by the State Reserve Bureau and possible purchases.

A "green" revival will set the tone for copper demand

Looking ahead, copper demand in China and other economies will recover in tandem.The demand-side bullish narrative comes from the energy transition. In the post-epidemic era, the focus of the global economy will shift to a "green recovery". 

Some major economies are expanding the share of renewable energy in electricity generation, while the penetration of new energy vehicles is growing. Based on existing government plans, we expect double digit growth in green investment to drive copper demand over the next five years.

China's recently released new energy vehicle industry development plan (2021-2035) shows that the market penetration of new energy vehicles will increase to 20 percent by 2025. The growth of new energy vehicles and the construction of charging infrastructure will boost copper demand.

In Europe, the Green New Deal is expected to increase copper demand by more than 800 kilotons over the next seven years, according to BNEF forecasts. The focus of the plan will be incentives for the installation of electric vehicles and charging infrastructure, retrofitting buildings to improve energy efficiency, and support for wind and solar power generation.

Globally, many countries have committed to carbon-neutral economies by 2050, reinforcing expectations of strong growth in copper demand in the future.