Copper analysts are reviewing their price forecasts for the red metal after simultaneous disruptions in two key sectors in China that together make up more than half the country's copper demand.
The collapse of a major Chinese property developer that has ignited debt worries for the construction sector and a coal shortage that has cut power supplies to manufacturers stack up as bearish factors for copper over the near term, analysts said.
China is the world's biggest user of copper, accounting for around 50per cent of global consumption, so a shake-up to its copper market balance has global repercussions.
Potentially offsetting that downbeat short-term outlook are forecasts for robust copper demand as part of the global energy transition for everything from charging stations to solar plants. Copper consumption by green energy sectors globally is expected to jump five-fold in the 10 years to 2030, data from consultancy CRU Group shows.
"Bearish short-term, bullish long-term is definitely a good way to sum it up. The longer-term demand dynamics are great. But short-term cyclical demand is clearly a worry," said Colin Hamilton, managing director at BMO Capital Markets.
(GRAPHIC: Copper prices - https://fingfx.thomsonreuters.com/gfx/ce/jnpweyqlmpw/Copperper cent202.png)
Benchmark LME three-month copper prices have been largely locked in a narrow US$9,000-US$10,000 per tonne trading range for the past four months, but Hamilton sees them dropping by around US$1,000 a tonne from now, or by more than 10per cent, due to weaker near-term use in China.
"I'd probably be more in the US$8,000 camp than US$9,000," he said.
Once China's top-selling developer, China Evergrande Group is facing one of the country's largest-ever debt restructurings with more than US$300 billion in liabilities.
The possible collapse of such a high profile builder and borrower has raised fears of contagion https://www.reuters.com/world/china/china-property-sector-woes-deepen-markets-await-evergrande-deal-2021-10-05 to the rest of China's vast property sector, a massive copper consumer that could be hobbled by any enduring credit crunch.
At the same time, prolonged power curbs in China https://www.reuters.com/world/china/china-power-crunch-slams-factories-coal-lobby-warns-not-optimistic-supply-2021-09-30 have raised uncertainty over how constrained manufacturing will become, and for how long, after factory activity unexpectedly fell in September.
Machinery, air conditioning, fridges and other consumer durables combined account for 42per cent of China's end-use of copper and construction takes up 22per cent, CRU data shows, while power accounts for 22per cent and transport 8per cent.
(GRAPHIC: Copper consumption breakdown - https://fingfx.thomsonreuters.com/gfx/ce/zdpxodlaevx/Copperper cent205.png)
"Weakening construction, credit tightening, Evergrande crisis and a power shortage in China are key headwinds for copper prices," said ANZ analyst Soni Kumari.
Analysts at Citi recently cut their price forecasts for copper to US$8,200 a tonne for the next three months from US$8,800 previously, and to US$8,600 for the first quarter of 2022 from US$9,000.
BUY THE DIP?
While most analysts agree on the softer near-term demand outlook, some are still waiting for evidence of consumption cuts before adjusting forecasts.
"To corroborate the idea of demand destruction in copper (by the power curb), we will have to wait for more data and evidence after the market returns from holidays," said ING analyst Wenyu Yao, referring to China's Oct. 1-7 Golden Week break.
China's tight copper inventories are also providing an offset to the broader macro picture, limiting market pessimism.
(GRAPHIC: Copper visible inventories - https://fingfx.thomsonreuters.com/gfx/ce/akpezqdxgvr/Copperper cent201.png)
Shanghai Futures Exchange warehouse inventories have dropped some 80per cent since May to their lowest since June 2009, taking the "visible" stocks, which include inventories in LME and Chinese bonded warehouses, to a record low, Refinitiv Eikon data showed.
"What's been clear for investors is the multiple-year low stocks in the onshore market which serves as part of the micro positivity," Yao said.
(GRAPHIC: ShFE copper inventories seasonality chart - https://fingfx.thomsonreuters.com/gfx/ce/znvnebyjapl/Copperper cent204.png)
Indeed, any near-term shake-out in copper prices is likely to be viewed by some as a buying opportunity rather than a signal of enduring market weakness.
ANZ predicts copper will hit US$10,000 a tonne towards the end of 2021, while ING sees average fourth-quarter prices at US$9,200.
"We are still strong believers in a copper super-cycle, and we see copper presenting a strong buying opportunity for medium- to long-term investors over the next 3-6 months," Citi analysts said.
(Reporting by Mai Nguyen in Hanoi; Editing by Gavin Maguire and Richard Pullin)