Commerzbank questions recent surge in copper price given dodgy supply situation

The dramatic price increase in the copper market is not as dire as it seems. 

The copper prices dropped about $500 per ton on Friday after US President Donald Trump threatened to impose additional tariffs of 100% on China, starting next month. 

“A renewed escalation of the trade conflict would significantly impact both economies and, therefore, two of the most important markets for copper,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank AG, said in a report. 

Although Trump adopted a conciliatory tone over the weekend, the market remained susceptible to further escalation and threat of increased tariffs. 

Prices remain susceptible

Prices recovered somewhat on Monday after Trump posted on Truth Social over the weekend, stating:

Don’t worry about China, it will all be fine! 

However, on Tuesday, the three-month copper contract on the London Metal Exchange dropped by more than 2%. 

In April of this year, during the most recent escalation of tensions between the US and China, copper prices experienced a temporary 16% decline. 

They fell from approximately $9,600 per ton to a yearly low of around $8,100.

While an agreement between two of the biggest economies is likely, it is by no means guaranteed, according to Nguyen. 

The copper market saw increased tightening on Monday, coinciding with a price recovery. 

Spot prices closed with a premium of $224 per ton over the three-month LME future, marking the second-highest level since data collection began in 1994, which indicates a scarcity of physical material, according to Commerzbank.

Imports and production

LME inventories have recently experienced a slight decline, following a period of increase since mid-June.

Nguyen added:

From our perspective, whether the price increase is fundamentally justified thus remains questionable.

Chinese trade data offered minimal fresh insights. Copper ore imports, while declining month-on-month, remained robust at nearly 2.6 million tons, surpassing this year’s monthly average.

“Thus, there is (as yet) no indication of an acute shortage of raw material,” Nguyen added.

The decrease in copper ore imports since April’s peak might not indicate a shortage but rather a deliberate political decision to slow the expansion of metal production capacity, according to Nguyen.

The Chinese government is actively working to control overcapacity, especially in the commodities sector. 

As evidence of this, the Ministry of Industry and Information Technology declared at the end of September that the production of the top 10 non-ferrous metals, including copper, should increase by an average of only 1.5% this year and next. 

This is a significant decrease compared to the approximately 5% growth seen in the past two years.

Nguyen said:

This would mean that copper production in China, the most important producer country, will continue to grow, albeit not as dynamically as in the last two years, when it recorded an annual increase of slightly over 5%.

Demand likely to fall

Simultaneously, a decline in demand is anticipated, largely attributable to the US-China trade conflict.

China’s refined copper trade data supports this trend. 

In the first nine months of this year, imports were down by approximately 2% compared to the previous year, while exports recently saw a 13% increase year-on-year (September data is not yet available).

The notable increase in exports during June and July could be attributed to US copper tariffs. 

Chinese exporters might have capitalised on the substantial price hike at COMEX, driven by the surge in US demand prior to the introduction of these tariffs, according to Commerzbank.

Nguyen noted:

All in all, our view remains that the current supply situation in the copper market is by no means as dire as the dramatic price increase for the metal might suggest.

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