The smelter will melt copper on July 23, 2020 in Jinhua, Zhejiang, China.
TPG | Getty Images News | Getty Images
JPMorgan has defended its declining base metal demand after the bank called a “healthy pushback” from investors.
In December, shortly after copper prices hit a seven-year high, Wall Street Bank’s commodities team closed the bullish call it held for much of 2020 on copper and other base metals and went neutral for the sector. She cited an early high, anticipating a later slowdown in Chinese credit as well as a delayed surge in new sources of demand from global decarbonization initiatives.
The bank is now forecasting an average price of $ 7,700 per ton for spot copper in the first quarter of 2021, moving to an average of $ 6,500 / t in the fourth quarter, while other base metals will see a similar downward trend if oversupply persists.
In a note on Monday, JPMorgan’s global commodity research director Natasha Kaneva and her team emphasized that objections to calling for credit cycles outside of China, “green” demand, underinvestment in supply that fuel the next “super cycle”, and the continued copper storage by the China Concentrated State Reserve Bureau.
“Our long-standing view is based on our assessment that the current China-driven super cycle has peaked and is unfolding as Chinese investment growth and exports as a percentage of the country’s GDP decline,” Kaneva repeated.
A “super cycle” generally refers to a multi-decade period of above-trend movement in base metal prices resulting from a fundamental structural shift in demand. Until a new super cycle develops, prices will remain committed to business cycles and driven by their more temporary highs and lows, the statement concluded on Monday.
Investors had argued, among other things, that a sectoral, rather than geographical, shift in demand could mean that a particular sector, such as green energy, is gaining a sufficient share of global demand to pull prices out of the economic pace towards “supercycle highs”.
“Our analysis estimates that a demand share of at least 20% of the total is required to start prices on the way to Supercyle highs,” replied Kaneva.
“The political guidance from China, the EU and the US suggest that the ‘green’ demand for copper is unlikely to exceed this mark until the early 2030s.”
In addition, she claimed that supercycle highs are caused by a sustained structural surge in demand that outstrips supply. However, JPMorgan analysts estimate that around 1.7 million tonnes of additional copper will be mined between 2021 and 2025, adjusted for disruption, which means supply will increase in abundance.
“Supply expansions are the result of large capital investments made in 2017-18 when manufacturers approved projects due to the recent price surge in 2016-17. The expansion investments (investments) are expected to increase 150% over the next five years Years from 2020, “she said.
One consistent criticism JPMorgan analysts received, according to the notice, was that while the Chinese credit cycle may have peaked, low interest rates and government incentives will continue to support credit growth outside of China.
“Our analysis shows that the continued weakness of the US dollar and the expansion of inflation-hedging investor flow into commodities remain a major risk to industrial metal prices. However, China’s credit cycle is far more important than the rest of the world,” said Kaneva.
JPMorgan estimates that the Chinese State Reserve Bureau currently holds around 2.7 million tonnes of copper on hand, almost three times as much as most ever stored in the US. That won’t be enough to prop up prices, however, the bank argued.
“While it’s impressive, China ‘only’ has around 80 days of inventory worth about 80 days in use days, while the US had 308 days of use in copper stocks at the height of the Cold War,” Kaneva said.
“While there is both motivation and precedent for the SRB to add to its holdings over the next 5 to 10 years, we believe it will be strategically timed in times of weak prices.”