2020 PREVIEW: Copper price gains underpinned by favorable long-term prospects

Copper prices began to rise on the London Metal Exchange in the run-up to year-end 2019, responding to the first signs of a thaw in the protracted trade war between the United States and China.

The copper LME official three-month contract closed at $6,201 per tonne ($2.81 per lb) on Monday January 13, up by 11.5% from the more than two-year low of $5,562 per tonne on September 3 after the US-China trade war took a toll on pricing. The September low marked a 23.5% decline from the nearly four-and-a-half-year high of $7,268 per tonne on June 8, 2018.

But it’s not only a ‘phase one’ US-China trade deal, slated to be signed on January 15, that is lending support to higher copper pricing, INTL FCStone senior metals analyst Natalie Scott-Gray told Fastmarkets.

“Copper is very much an indicator of economic health, therefor the macro environment does play a significant part in price direction,” she said. “However, the drivers behind copper are more intricate, particularly at present.”

Falling global stocks, an improving demand outlook, prior investor positioning and future supply constraints are supporting higher copper prices, Scott-Gray said. 

LME copper stocks stood at 130,000 tonnes at the close on January 12, down by 38.6% from 208,525 tonnes at the end of November, while on-warrant material fell to 98,625 tonnes from 120,000 tonnes. Total stocks ticked lower on Tuesday, to 128,100 tonnes.

Fastmarkets analyst Boris Mikanikrezai echoed Scott-Gray’s bullish outlook.

“We expect global refined copper consumption growth to accelerate to 2% this year from 1% last year on the back of a recovery in global manufacturing activity, especially in China,” he said in a report on January 13.

Apart from traditional uses of the metal, copper is one of the metals poised to benefit the most as the world moves toward renewable energy. Demand is expected to rise in tandem with increased use of solar and wind energy, along with greater use of electric vehicles.

Switch to supply surplus in 2020
The International Copper Study Group estimated the refined copper market at a 320,000-tonne deficit for 2019, but has forecast a surplus of 281,000 tonnes in 2020.

But Commerzbank has indicated this surplus number is “too optimistic,” given that ongoing anti-government protests in Chile – a major copper producer – show no signs of ceasing.

“Production is still hampered for various reasons in many places, and there are already signs that some of the disruptions to production will continue into [2020],” Commerzbank said late last year.

Chile has been subjected to widespread protests against high living costs and the country’s weak social security system. This resulted in strike action and walkouts at the major mines owned by Codelco and Antofagasta. 

These supply disruptions had partly prevented the copper price from falling further, but the continued protests led Chilean copper output to fall by 6.7% year on year in November 2019.

Additionally, copper supply from China faces growing uncertainty after smelter Donying Fangyuan’s bank accounts were frozen by court order and due to the possibility of production cuts in 2020, Fastmarkets analyst Andy Farida noted on January 10.

“Going forward, the situation at Dongying Fangyuan will remain a key focus of China’s copper smelting industry, which is now considering capacity cuts to boost processing charges,” Farida said of the troubled smelter.

Donying Fangyuan produced 748,000 tonnes of copper cathode in 2018, making it China’s largest private copper smelter.

Underinvestment in copper mining supports bullish price outlook
In the 2000s, increased demand for copper due to a rapid expansion in China’s economy – at a rate of up to 14% per year in 2005 – bolstered copper prices, according to the World Bank.

In the middle of that decade, the LME three-month official copper prices surged to a high of $10,124 per tonne in mid-February 2011 from a low of $1,340.50 per tonne in early November 2001, according to Fastmarkets’ price archives.

This supercycle prompted a flurry of capital expenditure activity from 2012-13, with $12-13 billion invested in new copper supply sources. This was partly responsible for sending copper prices down since then, according to Stephen Gill, managing partner at Zug, Switzerland-based Pala Investments.

The end of the supercycle had a “massive” impact on mining companies, according to Juan Carlos Guajardo, founder and executive director of Chilean mining consultancy Plusmining.

“While the supercycle brought an enthusiastic growth in investments, the downward [price] trend since 2012 has constrained the financial position of the companies which are struggling to control debt and regain shareholders confidence, therefore making it difficult to focus on growth,” Guajardo told Fastmarkets.

Patrick Cussen, who heads up Chilean consultancy Celta and was formerly managing director of Chile Copper Ltd, noted that current supply risks “are not major,” although declining grades of mined copper ore could fuel a potential shortage of the red metal.

For example, Codelco produced 1.68 million tonnes of refined copper in 2018, down from 1.73 million tonnes in 2017, reflecting the decreased copper content in mined ore.

Copper needs to be “well above” $3 per lb to attract investments
“Important investments won’t happen at $2.60 per lb,” Cussen said. “The copper price needs to be well above $3 per tonne ($6,614 per tonne) for new investments to occur.”

Pala Investments’ Gill agreed. “Either the world demand for copper [will need to] shrink substantially or the incentive price of $7,800-8,000 per tonne [$3.53-$3.63 per lb will need to be] reached,” Gill told Fastmarkets.

Pala Investments is a majority shareholder of US copper mine Nevada Copper, whose Pumpkin Hollow project is the first US copper mine to commence production in the past decade

About $8-10 billion in sustained annual capital expenditures are required “just to maintain current copper mine output,” Gill said.

The capital cost for bringing new copper supply online is around $18,000 per tonne, he added, so if 5-6 million tonnes of additional output is required over the next five to seven years to meet the world’s growing copper usage, investments in the industry need to total about $12-17 billion annually.

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