Diversified miner Eurasian Resources Group (ERG) says the unprecedented levels of stimulus across the world are set to sustain the recovery in copper demand in the longer term, with the supply impact of the Covid-19 pandemic expected to extend beyond this year.
Growth drivers include the digital economy, renewable energy and the fact that electric vehicles (EVs) are three to four times more copper intensive than conventional vehicles, CEO Benedikt Sobotka said on July 6.
He noted that the prolonged period of structural undersupply was expected, with prices potentially topping $7 000/t, starting at some point in 2021.
In April, copper was trading at below $5 000/t and most analytics were reaching newfound levels of bearishness, but towards the end of June, prices had experienced six consecutive weeks of increases and were now closer to the $6 000/t mark.
While copper inventories are visibly down by 33% year-on-year, Sobotka said copper concentrate treatment and refining charges had narrowed to the lowest level since 2013 and CIF Shanghai cathode premiums hit a two-year peak last month.
This evidence points to a tight market, which he said “justifies the current price level”.
To date, 700 000 oz of mined copper output has been lost, with further disruptions looming in South America. Though notably, Chile, the world’s largest mined copper producer, is contending with the third highest level of coronavirus cases per capita globally.
However, Sobotka highlighted that, perhaps even more significant, “are the losses on the copper scraps supply side”, which had largely evaded media attention so far.
He said the extensive lockdown measures across the world had stalled the scrap generation machine, and trade data available for the top scrap exporting nations indicated a more than 50% year-on-year contraction in April shipments.
To bring a sense of the scale, Sobotka explained that scrap accounts for about a third of total copper consumption, including direct-use scrap.
Looking further ahead, the supply impact of the coronavirus is expected to extend far beyond this year, as 2020 has already seen capital expenditure (capex) guidance cuts from copper miners and the mine project pipeline is shrinking owing to lockdown-related delays.
Turning to the demand side of the market, the pace of recovery has surpassed ERG’s expectations, especially in China. For example, China’s automotive sales surged by 14.5% year-on-year in May, highlighting that demand “was not destroyed, but merely delayed”.
Sobotka expects such pent-up demand to drive a similarly sharp recovery in the rest of the world during the second half of this year.
Moreover, he said the unprecedented levels of stimulus across the world were set to sustain this recovery in the longer term, especially from the copper-hungry green energy and digital economy sectors, which had been singled out for investment by many governments.
For copper, during the next decade, ERG expects the EV sector alone to add 1.5-million tonnes of cumulative demand.
Renewable power generation is also copper-hungry and on the rise as countries seek to meet net zero commitments, Sobotka commented, noting that another often-overlooked growth sector is the new digital economy.
China plans to invest $3.5-billion in digital infrastructure this year, and ERG expects these power-intensive data centres and fifth-generation networks to drive a growing need to expand grid capacity.
Further, copper’s disinfectant powers have long been known and its antibacterial, antiviral and antifungal properties have been supported by scientific studies, Sobotka added, noting that as companies, governments and organisations look for ways to try and protect people from epidemics, copper-coated surfaces may prove effective and drive demand.
In conclusion, the latest developments in the copper market lead him to believe that the world has just entered a prolonged period of structural undersupply.
This will be hugely supportive to prices, and while the next $1 000/t upward leg may take a little longer than three months, Sobotka believes the world “may be seeing prices starting with a seven at some point in 2021”.