Frankfurt Anyone looking at the price of copper at the moment might think that the global economy is running at full steam. The industrial metal has risen by around 13 percent since the beginning of the year. The copper price recovered quickly from a slump in March, at times it was quoted at over 7,000 dollars per ton – this is the highest value since 2018.
The situation on the energy market is very different: Oil from the North Sea Brent currently costs around 42 dollars per barrel (around 159 liters) – and thus still 35 percent less than at the beginning of the year. The highs of over $ 80 from October 2018, when the hunger for oil was high and supply low, seem unreachable at the moment.
It is historically extremely unusual that both raw materials develop so differently. Because both oil and copper are considered cyclical raw materials, the price of which rises when the global economy is booming. Michael Salden, Head of Raw Materials at Vontobel Asset Management, confirms: “It is very rare for copper and oil prices to diverge so widely.”
The discrepancy between copper and oil prices reveals a lot about the winners and losers of the corona crisis – and how far it is until the global economy has recovered from the consequences of the pandemic.
China on course for growth
Copper is benefiting from the strong demand in China. The country has recovered almost completely from the corona crisis, says Vontobel analyst Salden. The recently published figures on economic growth were still cautious.
In the third quarter, the Chinese economy grew by 4.9 percent, significantly less than before the corona crisis. But things started to pick up slightly in the second quarter.
China was the first large economy in the world to regain growth during the corona crisis. In addition, the Chinese government is pushing growth with extensive fiscal packages and investments in infrastructure.
The conductive metal copper is used extensively in the construction industry, but also in the electronics industry and mechanical engineering. These copper-intensive industries particularly benefited from Chinese investments, said Salden. “China, for example, is greatly expanding the country’s power grid.”
In addition, the copper price benefits from a strong yuan, adds Ole Hansen, head of raw materials strategy at broker Saxobank. The Chinese currency has recently appreciated significantly against the dollar. This lowers the price of copper in China – and also has a positive effect on demand.
In addition, the copper supply is rather scarce, as the supply chains are still disrupted during the pandemic. The industry association International Copper and Study Group expects global mine production to decrease by 1.5 percent in 2020.
Even in the long term, there is no improvement in sight. Vontobel expert Salden says: “It is already foreseeable that the market for important industrial metals such as copper and nickel will show a supply deficit in the coming years.” The times when large deposits were regularly discovered were long ago. “It’s getting harder and harder to open up new mines.”
On the oil market, the signs are exactly the opposite: Balances expects that the risk of excess supply will prevail until at least the beginning of 2021. “The Covid-19 crisis hit the oil demand much harder,” he says.
In the meantime, oil demand collapsed by 20 percent. It is still around five to six percent below the pre-crisis level. “The decline in air traffic is the most important explanation why there is still demand for three to four million barrels less per day.”
A development that the Organization of Petroleum Exporting Countries (OPEC) and the allied states of the OPEC Plus Alliance are closely monitoring. At the height of the oil price slump in April, they had taken around ten percent of the world’s oil supply from the market by cutting production. The expanded oil cartel is still reducing the oil supply by almost eight percent.
Actually, Opec Plus wanted to slowly open the oil taps a little further from January. But the OPEC officials are also watching the rising number of virus cases with concern.
Opec General Secretary Mohammed Barkindo recently said: “We are on the path to recovery, but this is not happening as quickly as we expected.” Russian President Putin was therefore open to granting the strict funding quotas beyond January extend.
Giovanni Staunovo, analyst and OPEC expert at the Swiss bank UBS, also expects this. He expects that Opec Plus will extend the current production quotas by several months at their meeting at the end of November. According to his estimates, the price of oil should not exceed $ 45 a barrel by the end of the year. He does not expect a noticeable recovery in prices to up to $ 55 per barrel until mid-2021.
Still, time is of the essence for OPEC. Vontobel manager Salden expects the cartel to regain market share. “The US shale oil industry is shrinking,” he is convinced. This has weakened Opec’s most important competitor. Especially since the US oil industry is likely to have a difficult position under a possible US President Biden.
Salden does not expect any impulses for the oil supply from Shell, BP or Total either. “The major European oil companies are facing great pressure from shareholders to reduce their dependence on oil.”
The deals are meanwhile secured by the OPEC countries: the world’s largest oil consumers China and India have recently concluded numerous long-term supply contracts with state-owned companies in the OPEC countries, according to Salden. He assumes that by 2025 at the latest, the Opec-Plus states will combine all reserve capacities. The cartel is likely to use the regained power to drive the oil price up.
The oil price should therefore catch up with copper by the middle of next year at the latest. However, both raw materials are suitable as long-term investments. The electrification of mobility is likely to further fuel demand for copper.
At the same time, the hunger for oil in emerging countries such as China or India is far from being satisfied. And if the loose monetary policy and the growing national debt should actually result in higher inflation worldwide, both commodities protect the portfolio from inflation.
More: China is the last hope for the troubled oil market.