US Elections and Covid-Recovery effects on Copper market
PRICE MOVEMENT – HISTORICAL PRICES: from 19/10/2020 to 17/11/2020
The price on the Y-axis is in US dollar per ton.
Source: https://www.lme.com/en-GB/Metals/Non-ferrous/Copper#tabIndex=2 (consulted November 18th 2020)
This graphic shows a certain level of volatility in the price for copper. It can be explained by the following:
The US elections have caused a certain political instability in the country which has led to a decrease of the US Dollar value. This decrease in the dollar has led to a decrease of the perceived price of copper since the commodity is mainly traded in US Dollars. Then come ups and downs showing the volatility of the US Dollar following Joe Biden’s victory and Donald Trump’s non-acceptance of this outcome.
Following the final outcome of the elections, the US Dollar has more or less stabilized but will still remain volatile as long as Donald Trump will not accept the US election results. This impacts the value of the dollar, and thus the perceived price of copper.
From a demand and supply perspective, however, demand is still in slight increase following the recovery post-first-covid-wave and supply is “late” compared to last year’s results with a 2.1% decrease in 2020 due to measures taken to decrease the spread of the virus in producing countries. However, supply is expected to catch up quickly and get back to usual levels (expectation to be shown in the forward curve below).
PRICE MOVEMENT – FORWARD CURVES
Data source: https://www.cmegroup.com/trading/metals/base/copper_quotes_globex.html?optionProductId=797&optionExpiration=797-X0 (consulted November 18th 2020)
The graphic shows that the forward curve on the 18.11.2020 is clearly different from the one on the 29.10.2020. Since all the prices of the forwards got higher we can estimate that the market is doing better than expected. From December 2020 to February 2021, we have a contango which means that the market is expected to be well supplied for that period, followed by a small backwardation for the month of march, then the market has a contango up until December. We can conclude from that the view of the market as of today over the next year is pretty good, because the market is mostly contango which means an estimated good supply of the market over the next year.
Compared to the 29.10.2020 forwards, the period between November and January is no longer a backwardation but a contango, which means that the market view on the 18.11.2020 changed for a good supply over the next months. This can be related to the vaccine announcements made by Pfizer and Moderna.
It’s also related to the clarity over the situation of the USA, since now we have the results of the election, the dollar got stronger and more stable.
The fact that Joe Biden is elected as a president can explain the contango over the next year, that can be explained by a more stable political situation, specially with China.
ILLUSTRATION OF SUPPLY AND DEMAND / INVENTORY LEVELS
Source: http://www.copperenews.com/copper-warehouse-stocks.asp (consulted November 18th 2020)
As explained in the last bulletin for copper, the stock of copper got higher due to the continuity in production and mining in the producing countries during the first wave of COVID-19. The stock from the 29.10.2020 and today dropped slowly but it doesn’t affect the market. As said before, the demand of copper is slightly increasing following the recovery after the first wave of COVID-19; yet the supply didn’t fully recover after a slow delay gained after the first wave of the virus which explains the small drop in copper inventories.
Because China is a big consumer of copper and didn’t suffer from a second wave of COVID-19, their production (and consequent need for copper) remained stable during this second wave that hit Europe and the US.
Yet this situation isn’t a sign of shortage on the market, it can be explained by a transitioning period.
Nevertheless, the price of copper is hugely impacted by the dollar stability that can explain why the stock got down a little since the dollar got weaker during the election period which might have encouraged the buy of copper.
RECOMMENDATIONS
We have a contango up until February, we advise for a strong buy in this period, to sell from February to March since we have a small backwardation, and buy in March since the year is going through a contango. We also advise buying strongly due to COVID-19 evolution many countries will start or have started already the mass vaccination which will help the economy to recover. Since copper is highly correlated with the economic activity we recommend a strong buy now.
— By Ismail MODAFFAR IDRISSI, Tashi JARON and Amélia REUSSER
BIBLIOGRAPHY
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/copper-supply-faces-struggle-to-keep-up-with-growing-demand-60471925 consulted November 18th 2020
https://www.spglobal.com/platts/en/market-insights/latest-news/metals/110420-gold-and-copper-little-changed-as-market-awaits-us-election-result consulted November 18th
https://www.x-rates.com/graph/?from=USD&to=EUR&amount=1 consulted November 18th