Robust long-term fundamentals
Much of the recent jump in the copper price has been attributed to the potentially reflationary effects of the Trump Presidency and a stronger short-term demand outlook in China. However, sitting behind this is a strong fundamental story for copper based on increasing market deficits towards the end of the decade and into the early 2020s.
Lack of near-term project development
Most pertinent is that even accounting for the price-related reversal of cutbacks and early restarts to mine production, supply from existing operations has arguably already reached a plateau and is set to decline by 6M tonnes in the 2020s. This is primarily due to declining ore grades and depletion at many mines around the world. That would not necessarily be a problem if there were sufficient new capacity being built. However, there is less than a million tonnes of what we consider "firm" greenfield projects due on-stream between now and 2021, including just two large-scale (>100,000t/y) developments (Cobre Panama and Qulong). The rather thin committed pipeline is indicative of the suspension, postponement or abandonment of many mine developments over the last couple of years, for a variety of reasons but mainly due to the low copper price.
You might even ask whether there is a risk of an actual physical shortage of copper that would necessitate a much higher price in order to bring about the required demand destruction and rebalance the market. This is a possibility in the short to medium term. However, in the longer-term we assume that there will be a supply side reaction. Indeed, our comprehensive database holds the details of literally hundreds of brownfield and greenfield projects that could be brought online by the end of the 2020s. Together these add up to tens of millions of tonnes of copper, despite the fact that the majority of potential projects, especially outside South America, are well under 50,000t/y. This is not a new phenomenon. Indeed, between 2006 and 2016, when 11Mt of new mine supply was added globally, the average size of brownfield and greenfield developments was just 50,000t/y and 45,000t/y respectively. This in part reflects the polymetallic nature of the majority of copper concentrate mines, which means that by-product revenues can compensate for the high on-site costs incurred due to lack of scale.
Chinese real estate sector a focal point
How much copper will be needed is the next question. The answer is down to demand and in particular China. Since the turn of the century, Chinese refined copper consumption has grown nearly six-fold to over 10Mt and the country now accounts for almost 50% of global demand. GDP growth has slowed in recent years and consumption rather than investment will be the driver of growth going forward, which is a negative for materials consumption. The consensus is that Chinese refined copper demand will peak by the early to mid 2020s. One sector that could determine whether this happens sooner rather than later is urban real estate. Recent newsflow has centred on price inflation and supply tightness in tier one and two cities, along with some evidence that destocking is underway in lower tier cities. However, interestingly, our in-house economics team's bottom-up model indicates that there should be a renewed wave of residential construction activity in the 2020s, as the process of demolishing and replacing existing buildings, many of which are low quality, accelerates.
Of course, not everything is about China and the continued build-out of infrastructure in the other emerging Asian countries, along with secular growth in North America and Europe, will be required if the copper market is to continue to increase in size over the next few decades. In addition, the threat of substitution and the uncertainty over the future availability of scrap are of course analysed and factored into our forecasts. We also consider in detail the likely effect on demand of new energy in the transport and power sectors. After all, a full electric vehicle contains around three times as much copper as one powered by a conventional internal combustion engine, while solar and off-shore wind use five to seven times as much copper per megawatt as traditional fossil fuel technologies.
Likely increase in the long-run price
The resulting gap between committed supply and primary demand determines how much additional production will be required. This number could approach 10M t/y by 2030. We consider which projects to include by ranking them according to their full economic costs of production. Remember, this includes capital costs that typically account for around 40% of the total. The costs of the last mine to be included then set the long run marginal cost (LRMC) or attractor price for the industry. It is assumed that the actual copper price will gravitate towards this level in the long run.
As the chart below demonstrates, between early 2014 and early 2016 the LRMC declined by 15% as capital and operating costs declined, due in large part to reduced cost pressures within the copper industry and the structural decline in the oil price. However, the level reached was still over three times the sub-$1.00/lb at the start of the 2000s. The 2017 number will be included in the forthcoming Copper Long Term Market Outlook (including Copper Mine Project Profiles). Our provisional findings are for an increase given the thinning of the project pipeline in particular; however, we are being careful to make sure short-term market movements do not overly-influence long-term thinking.
CRU offers further analysis of all of these issues in the Copper Long Term Market Outlook (including Copper Mine Project Profiles).
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Robert Edwards, Managing Consultant
Robert Edwards has almost twenty years experience in the metals and mining industry. He is responsible for CRU's copper research on demand and markets in the Americas and Europe. Previously, he has worked on copper costs and ferrous bulk raw materials and finished steel markets.
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