"There are some uncertainties on the demand side for copper," said Xu Yulong, deputy general manager of state-owned China Copper International Trading Group, on a panel discussion.

"People think consumption from Western countries may pick up and some of the export orders will return back to the local market. But we still have problems in real estate demand. This is really a big concern… if we look at China's policy and the dynamics in the real estate sector especially, we believe the deleveraging campaign will continue in the first and second quarters of next year," said Xu.

China implemented tougher risk controls known as the ‘third red lines' on the property sector a year ago that have cast a pall over a pillar of the world's second-largest economy. Property accounts for 22% and 15% of copper and aluminium demand respectively in China, according to consultancy CRU Group.

As a key driver of China's economy, property itself has far-reaching and significant influence across other important sectors. More than one-quarter of China's GDP stems from property and related sectors along its supply chain, according to Moody's Investors Services.

Property doldrums

But contagion has surfaced across parts of China's homebuilding sector, triggered by the financial distress of China Evergrande Group - the country's most-indebted developer currently wrestling with more than RMB 2 trillion ($305 billion) of liabilities.

Evergrande has so far managed to avoid a formal default by making several bond coupon payments at the last minute, but there is scepticism over its capacity to ride out the crisis - the beleaguered developer needs to pay nearly $1 billion in coupon payments from this month to next April.

China's property market is known for its boom-and-bust cycles, but the current, contagion-tinged downturn is unusually intense, said Xu. He noted that contracted sales are faltering as authorities tighten funding, while measures to restrict credit to the property market have hit developers' liquidity - all indications that the sector will enter a prolonged downcycle that will be bearish for copper in the short term.

There have been some nascent signs that Beijing is easing curbs on the property sector. A jump in Chinese property stocks last week coincided with a recovery in property bonds, and partly came as Chinese regulators loosened policies and some local banks relaxed mortgage lending quotas, ordering branches to boost loans to customers with high standing, the Economic Observer newspaper reported over the weekend.

Copper deficit

The most pressing issue facing China's copper industry chain is a resource shortage that stems from continued growth in copper product consumption. Copper processing capacity exceeds smelting capacity, while smelting capacity in turn is greater than copper concentrate supply, leading to a supply shortfall.

Chinese copper prices have been volatile of late, swinging on account of factors ranging from the supply deficit to Beijing's campaign to correct commodity prices. Domestic copper inventories in China have declined by nearly three-quarters since the end of May, fuelling concerns about supply that have subsequently pushed copper prices higher, said Xu.

Last month the most-traded copper contract on the Shanghai Futures Exchange (ShFE) hit a near five-month high of RMB 76,700 ($12,000) per tonne.

But China's recent intervention in the coal market to control sky-high domestic prices and ease a power crunch triggered a slump in the domestic ferrous metals market. The sell-off in turn weighed on base metals, sending prices of copper and other industrial commodities lower. The most-active ShFE copper contract fell below RMB 70,000 per tonne at one point in October, and closed at RMB 70,540 per tonne at the end of the month.

Wang Xiaohong, director of metals and mining research at the Shanghai office of Engelhart Commodities, said the recent price fluctuations were to do with unique conditions that included China's power crunch two months ago. "I believe the price gyrations have not much to do with fundamentals. For us, we just encountered a very rare situation, that is, the power shortages," Wang said.

The recent power crisis led to widespread electricity rationing but had a relatively muted impact on the domestic copper market. The effects were felt more by downstream copper processing companies than smelters and refiners, according to Wang.

The sense is that China's current supply deficit will move into oversupply next year as new capacity is added amid soft demand from traditional consumption sectors such as property and power, according to Wang Wei, general manager of Orient Group Products.

Chinese demand also faces headwinds from slowing exports as the global economy recovers and manufacturing picks up overseas post-pandemic. New demand from solar and renewables-related sectors remains too small to offset the demand decline in the property and power sectors.

Price uncertainty going forward

Delegates at the conference were in general agreement that the Yangshan copper premium, a widely-watched benchmark of China's import demand, would average more than $70 per tonne in 2022 - down from the October peak of $140 but higher than June's recent low of $21. The premium is paid on top of the benchmark LME copper price for physical delivery of refined copper into China through the Yangshan bonded area in Shanghai.

Reports emerged from China at the beginning of this month that Chile's Codelco offered Chinese customers annual copper supply for next year at a premium of $105 per tonne, which would be up by 19.3% from $88 this year.

Sporadic outbreaks of COVID's Delta variant continue to affect China while seafreight remains impacted by the global supply chain disruption, which are factors that will support the premium going forward, according to Ni Hongyan, a vice president at Shanghai Jinjin Industrial and the company's general manager of foreign trade.

"Looking at copper cost, it doesn't matter if it's for procurement or holding, it's still quite high. If we looking at the average price of the copper in Yangshan, it's been between $60-70, but we still have a relatively low level of stock. We can see it increasingly slightly to a higher level of $70-80."

Xu on the other hand was less confident on giving a price range, pointing to logistical disruptions worldwide as a considerable uncertainty in the price outlook. "I think we still need to look at the supply chain. Will the disruption of this year continue? There are different factors affecting the supply, including [supply from] Africa… and Russia."