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Copper bulls are running this week,
as the red metal used in plumbing, wiring and transportation hit a fresh
10-month high. Meanwhile there are other signs of strength in the price of
copper, which is seen as a good predictor of future economic growth.
The base metal is called “Dr.
Copper” for its ability to diagnose the health of the world economy, since it
is so much in demand for new construction, telecommunications and other
infrastructure that is built when economies grow.
However, the slowdown in Chinese economic growth has been a concern to
base metal miners and investors. In
2018 China’s economy grew at just 6.6%, the lowest level in 28 years.
This is important for copper because China consumes nearly half of the
world’s supply. If China’s growth is slowing, it’s a safe bet copper is too.
Yet there was room for optimism on
Wednesday, after the release of key Chinese economic data indicating the
promise of higher demand.
Various sources reported through the
week that industrial production grew from 5.3% last February, 2018 to 8.5% in
March. New construction starts were 18% higher in March 2019 versus March
2018, fixed investment (good for commodities) increased by 6.3%, and bank
lending hit an all-time high of $870 billion in the first quarter. China’s
growth was 6.4% in Q1, defying expectations of slack GDP performance.
The good economic news was enough to
lift copper futures 2% higher, reaching $2.95 per pound or $6,604 a tonne, on
the Comex in New York - the best performance since last July.
Supply disruptions likely
Price spikes are great, but the
longer-term story for copper is all about supply.
As we wrote in The coming
copper crunch, by 2035, without major new mines up and running to replace
the ore that is being depleted from existing copper mines, we are looking at
a 15-million-tonne supply deficit by 2035. Four to six million tonnes of
added capacity are needed by 2025.
This year, output is expected to be
curbed by a strike at Peru’s Las Bambas mine and disruptions at
other mines in Chile, Spain and the DRC, according to Capital Economics, a
macroeconomics research firm.
The CEO of Antofagasta, a major copper miner in Chile, isn’t expecting
strikes at his company’s operations but “We think this year there will be
bigger disruptions than last, which was unusually tranquil,” Ivan Arriagada was quoted
by Mining Weekly at CRU’s World Copper Conference in Santiago.
That, plus heavy rains in the arid plains
of northern Chile, and two months of indigenous protests at MMG’s
Las Bambas mine in Peru, will likely present a supply
problem, Arriagada said.
“We’re going to have a supply
deficit that will begin to show itself in the next 24 months, which will not
only support the current copper price but also, send it upwards.”
Citi
Bank has said it expects the bellwether metal to rally 10% over the
next three to six months, during which time the Chinese and US trade
delegations should come to an agreement on the year-long trade dispute.
That would put copper at $6,700 a tonne this year due to 2% growth in
Chinese demand “led by strong growth in late cycle construction completions
and power infrastructure investment,” Citi said, adding that growth in
electric cars will buttress copper needs.
The bank also predicts copper inventories, which last month dragged a
10-year low, will fall further in the second quarter and leave the copper
market in a deficit of 200,000 tonnes this year and next.
Morgan Stanley recently joined Citi
and Goldman Sachs in copper’s bullish camp. Morgan Stanley is projecting a
14% upside for copper in 2019 and upgraded the shares of major US copper
miner Freeport McMoran, while Goldman upgraded Rio Tinto, which has five
copper mines including Bingham Canyon in Utah, Oyu Tolgoi in
Mongolia, and the Resolution copper mine in Arizona it is developing with BHP.
Chinese copper imports
Another factor affecting copper prices to the upside, is robust demand
from Chinese smelters. Hit by a series of delays last year, Chinese copper
smelting expansions are ramping up, requiring concentrate to smelt into
saleable end uses. Major smelters starting up
include Chalco’s Ningde, Lingbao Jincheng Metallurgical
and Tongling’s Ausmelt project, Metal
Bulletin said.
Data published over the weekend showed imports of unwrought copper jumped
26.5% in March compared to the same month last year. Shipments of copper
concentrate and copper ore increased by 10.4% in March, and a healthy 20% in
the first quarter - on track to beat the record 19.7 million tonnes of copper
concentrate imports set in 2018, MINING.com
reported.
Copper demand for EVs
Meanwhile the demand for copper is
not expected to let up. Consider the rapidly growing need for the base metal
in electric vehicles.
A typical EV has four times as much copper as a regular gas-powered
vehicle. Over the next decade copper demand is expected to increase between 3
and 5 million tonnes. After that, copper demand for EVs alone could reach 11
million tonnes. The International Copper Association says over
40 million charging ports will be needed over the next 10 years,
consuming an extra 100,000 tonnes of copper annually, by 2027. But we
are facing
a copper deficit as early as 2020.
Imagine a world without copper. There would be no copper wiring, therefore
no means of electrifying new buildings, no material for solder, no computers,
TVs, circuit boards, semiconductors, microwaves, modems and routers.
The transportation industry is reliant on copper for components of
airplanes, trains, cars, trucks and boats. A commercial
airliner has up to 190 kilometers of copper wiring, while high-speed
trains use up to 10 tonnes of copper per kilometer of track.
In electric vehicles, copper is a major component used in the electric
motor, batteries, inverters, wiring and in charging stations. Without a
copper substitute (there is none), the shift from gas-powered cars to EVs
would abruptly stop.
Even if we mined every last discovered, and undiscovered, pound of
land-based copper, the expected 8.2 billion people in the developing world
would only get three quarters of the way towards copper use parity per capita
with the US, if we assume 10 billion people by 2050.
Unless new investments arise,
existing mine production will drop from 20 million tonnes to below 12 million
tonnes by 2034, leading to a supply shortfall of more than 15 million tonnes.
That’s because over 200 copper mines are expected to run out of ore before
2035, with not enough new mines in the pipeline to take their place.
Clearly it’s a good time to be a
copper miner or explorer, since rising copper prices are bound to influence
the stock prices of both majors and juniors.
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This document is not and should not be construed as an offer to sell or
the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he
believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no
responsibility or liability as
to its accuracy or completeness. Expressions of opinion are those of
Richard Mills only and are subject to change without notice. Richard Mills
assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report
and will not be held liable for the consequence of reliance upon any opinion
or statement contained herein or any omission. Furthermore, I, Richard Mills,
assume no liability for any direct or indirect loss or damage or, in
particular, for lost profit, which you may incur as a result of the use and
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