Copper in the US $ 3: China factor, fall in production and dollar explain strong rise and experts do not rule out that it continues to rise

While some voices linked to mining celebrate this “surprising” level that the red metal has reached in the midst of the pandemic, they call for “prudence”, since the value registered today is well above the annual average.

Good news this morning delivered copper for the delicate economic situation in the country: it closed this Wednesday’s session on the London Metal Exchange scoring a strong rise of 2.68% and was installed, for the first time in more than two years, above US $ 3 a pound.

The country’s main export product – which last year accounted for 48% of national shipments – ended the day trading at US $ 3,024 per pound counted “grade A”, its highest level since June 27, 2018. the monthly average of the price of the red metal was US $ 2,921 and the annual price was US $ 2,584. In addition, the commodity moved further away from its low of the year, when on March 23 it scored US $ 2.09 a pound, accumulating a 44.4% rebound from that date to today.

“That means that we are going to have a greater reactivation of Chilean mining, which has not stopped during all this time,” said the Minister of Mining, Baldo Prokurica, emphasizing that “we are going to see a light at the end of the tunnel, because This means higher tax collection and more resources to help Chilean families who are having a hard time.”

Copper last year contributed 8.5% of the national GDP, and Chile currently generates 28% of all the red metal mined in the world. For this reason, like the minister, voices linked to mining celebrate the, for some, “surprising” price that the red metal has reached in the middle of the pandemic and do not rule out that it continues to escalate. In any case, they call for “prudence”, since the value registered this Wednesday is well above the annual average.

China, lower production and dollar: The factors that drive copper

As Diego Hernández, Sonami’s president, explained to Emol, the rise observed in the copper price is fundamentally explained by three factors. First? “the economic recovery in China, the main consumer of metals in the world that currently captures half of the world’s copper consumption.” In effect, the GDP of Chile’s main trading partner grew 3.2% in the second quarter, compared to the 6.8% drop recorded in the first three months of the year. Also, Hernández continued, the growth in the price of the red metal is driven by “the paralysis of some mines in producing countries and, furthermore, by lower availability of copper scrap, which last year represented 16% of refined copper and this year only half “. “Another aspect that affects the increase in the price of copper is the depreciation of the dollar at the international level, since the metal becomes cheaper for holders of other currencies,” he said.

For Joaquín Villarino, executive president of the Mining Council, these positive news regarding the price of copper should “be taken with caution”, since “part of the increases in recent times come from the depreciation of the dollar worldwide, which only has a nominal effect, by the currency in which the value of copper is measured “. “On the other hand, there are the better prospects for the Chinese economy, supported by internal state stimuli and conditioned by the performance of the rest of the world, which still does not show signs of a vigorous and continuous recovery. And thirdly, the risks of lower copper production due to sanitary restrictions on the operation of works, of which in Chile we are not released, “he added.

While Juan Carlos Guajardo, executive director of Plusmining, said that “the price of the metal has been positively impacted by short-term factors that have evidenced certain weaknesses in the copper supply such as the lower production of refined copper in China in July which reflects and confirms the decline in mining production in countries such as Peru, Panama or Brazil and the adjustments in the production goals that some countries have set “. “On the other hand, there are positive indicators in the world economic recovery and inventory levels in the London Metal Exchange at 7-year lows, added to the fact that August has historically been a month of high economic activity in the northern hemisphere , which provides support to the red metal. Added to this is a favorable financial environment, especially due to the weakness of the dollar, derived from liquidity unparalleled in the world, “said Guajardo.

“Surprise” levels and expectations

The academic and former director of the UC Mining Center, Gustavo Lagos, pointed out that the fact that copper has reached these levels in the context of a pandemic “is a surprise” and does not rule out that it continues to advance: “I think it will go up a little more in September, “he said. In addition, he assured that “above US $ 3 all the large Chilean companies are making profits and all must pay taxes for each increase that occurs”, which is good news for the treasury, considering that “for every penny over the US $ 3 per pound Chile receives US $ 127 million per year in higher exports (if that price is maintained throughout the year), and approximately half of it goes to the fiscal coffers, either as a contribution from Codelco or as a tax on private companies “.

Villarino, for his part, indicated that as a result of the volatility of the dollar, the recovery of China and the risks in the supply of copper in the world, the value of US $ 3 is not “totally surprising”, and stressed that “it is it is a one-off result and is far from representing the average for the year, “projecting that the metal will end 2020 with an average price of US $ 2.7. In any case, he assured that “without a doubt” having a copper price “with rising signs” is good news for the country. “This, added to the considerable efforts of mining to maintain its operational continuity during this pandemic, managing to sustain copper production with small variations during the year.”

“In light of the severity of the global crisis, it is surprising to observe such high prices,” said Guajardo, adding that from March to date, market expectations “have moved from a deep pessimism in the price of the metal, towards a glance bullish supported by the fundamentals of supply and demand, the great liquidity of the global market, the weakness in the dollar and the greater appetite for assets to hedge against inflation “. Thus, he expects copper to continue to strengthen and the 2020 average value to scale from the current US $ 2.58 to $ 2.90. “subject to a high level of volatility and certain downside risks not materializing in negative impacts on economic activity. It cannot be forgotten that we are still in a very complex situation with health, economic and geopolitical risks.”

Finally, Hernández, from Sonami, stated that “for Chile, the price of copper is not indifferent, because for every average annual cent of the dollar that the price of copper increases, the country increases its income by US $ 125 million from exports and the treasury in US $ 60 million, for the concept of Codelco surpluses and private mining taxation. ” “We must bear in mind that mining will play a key role in the economic recovery of the country, just as it has done in the past in complex moments in our history, as well as in the last three decades it has been a very relevant actor, attracting investments, generating employment, promoting growth, opening a large foreign market and providing relevant financial resources so that the State can develop its work, “he concluded.

Source: Emol

Translated with Google Translator