In April, copper was trading below USD 5,000/t and most analysts were reaching newfound levels of bearishness.
Fast-forward to the end of June, and prices have just experienced six consecutive weeks of increase and are now knocking on the USD 6,000/t door.
Visible copper inventories are down by an astounding 33% YoY, copper concentrate treatment and refining charges (TC/RCs) have narrowed to the lowest level since 2012 and CIF Shanghai cathode premiums hit a two-year peak last month.
The evidence points to a tight market, which justifies the current price level.
To date, 0.7 Mt of mined copper output has been lost, with further disruptions looming in South America. Notably, Chile, the world’s largest mined copper producer, is contending with the third highest level of coronavirus cases per capita globally.
However, perhaps even more significant are the losses on the copper scrap supply side, which have largely evaded media attention. The extensive lockdown measures across the world have stalled the scrap generation machine.
Trade data available for the top scrap exporting nations indicates a more than 50% YoY contraction in April shipments. To put a sense of scale around this, scrap accounts for around a third of total copper consumption (including direct-use scrap).
Looking ahead the supply impact of the coronavirus will extend far beyond this year. 2020 has already seen capex guidance cuts from copper miners and the mine project pipeline is shrinking due to lockdown-related delays.
Turning to the demand side of the market, the pace of recovery has surpassed our expectations, especially in China.
For example, China’s automotive sales surged by 14.5% YoY in May, highlighting that demand was not destroyed, but merely delayed. I expect such pent-up demand to drive a similarly sharp recovery in the rest of the world during 2H20.
Moreover, the unprecedented levels of stimulus across the world are set to sustain this recovery in the longer term, especially from the copper-hungry green energy and digital economy sectors, which have been singled out for investment by many governments. Electric vehicles are 3-4 times more copper-intensive than their combustion engine equivalents.
For copper, during the next decade, we expect the electric vehicle sector alone to add 1.5 Mt of cumulative demand. Renewable power generation is also copper-hungry and on the rise as countries seek to meet Net Zero commitments. Another often-overlooked growth sector is the new digital economy.
China’s State Grid plans to invest US$3.5 billion in digital infrastructure in 2020, and we expect these power-intensive data centres and 5G networks to drive a growing need to expand grid capacity.
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Copper’s disinfectant powers have long been known and its antibacterial, anti-viral and anti-fungal properties have been supported by scientific studies. As companies, governments and organisations look for ways to try and protect people from epidemics, copper-coated surfaces may prove effective and drive demand.
To conclude, the latest developments in the copper market lead to believe that we have just entered a prolonged period of structural undersupply.
This will of course be hugely supportive to prices, and while the next US$1,000/t upward leg may take a little longer than three months, we believe that we may be seeing prices starting with a seven at some point in 2021.
AUTHOR: Benedikt Sobotka, CEO of Eurasian Resources Group