A spike in Covid-19 cases and subsequent lockdowns in China, the world’s top copper consumer, have eroded demand for the metal, sending prices hurtling after a strong run up over the past two years.

The rally was driven by demand for clean-energy investments and concerns about supply from top producers in Chile and Peru. The Russia-Ukraine conflict that began on February 24, 2022, intensified the supply worries and drove prices up to a record ~$10,720 per tonne on March 7. This, even as production of refined copper was being ramped up in China after the Winter Olympics ended on February 20.

Then Covid-19 cases resurfaced in China, stoking both demand and supply fears. The production of refined copper, which was being ramped up in the mainland, thus became available for exports. This led to LME inventory doubling in April compared with February.

Copper prices have since crashed to ~$9,200 per tonne in May, a 14% decline from the March peak. They are expected to remain under pressure in the near term on softer Chinese demand, stronger US dollar (due to monetary policy tightening by the US Federal Reserve), and improvement in mine supplies.

Says Hetal Gandhi, Director, Crisil Research, “After being in deficit over the past two calendar years — including ~450 kt in 2021 — refined copper may be in a marginal surplus now as supplies from Chile, Peru and Africa have improved. This trend should continue and, along with rising interest rates will put downward pressure on prices. We see copper prices averaging $9,000-9,300 per tonne in 2022 and 2023, which will still be significantly higher than the pre-pandemic levels.”

Domestic copper prices, too, had risen sharply over the past year, in sync with 3-month LME prices, as is the normative. The domestic price of copper wire bars averaged ~Rs 738 per kg (ex-factory) last fiscal, a ~42% increase on-year, with prices breaching Rs 800 per kg in March before retreating to ~Rs 790 per kg.

For the rest of this fiscal, however, we see domestic prices declining gradually, to average Rs 720-725 per kg.

That said, domestic producers have not quite benefited from higher prices as most are only converters and refiners, given their limited access to mines. Their profitability thus depends on treatment charge/ refining charge, TC/RC, margins that, in turn, depend on the availability of copper concentrate.

Supply of copper concentrate was impacted in 2020 and 2021 as Peru and Chile grappled with issues ranging from Covid-19 to labour strikes, leading to TC/RC margins of players in India hitting a low of $50 per tonne in the third quarter of calendar 2020. But as the supply of metal and concentrate improved over the latter half of 2021, margins rebounded to $80 per tonne.

Says Koustav Mazumdar, Associate Director, Crisil Research, “TC/RC margins have been clawing up over the past four quarters, hitting $80 per tonne in the second quarter of calendar 2022, implying a 48% rise. As mine supplies in Peru and Chile normalise over the year, aided by new capacities in Africa, TC/ RC margins will improve further.”