It’s been a wild start to the year for the copper market. We’ve witnessed riots in Peru, a reopened China and a shutdown at Grasberg, one of the world’s biggest mines. To make matters worse, Chile, the world’s biggest producer, has had to contend with general operational difficulties, as well as its own blockades.
The question is whether this volatility in the metal’s supply chain will remain – critical commodity shortages are no trifle, as the past year has shown, and inventories were at historic lows a few months ago. Already, Chilean state miner Codelco has reported an 11 per cent year-on-year drop in production to 1.45mn tonnes for 2022, and its key export hub is only operating at one-third capacity after a fire last year. A clearer picture will emerge as the major miners release 2022 results and 2023 forecasts in the coming weeks.
Copper is currently trading at just under $9,000 (£7,446) a tonne, after peaking in recent weeks at $9,500 a tonne. “We expect copper prices to continue to exhibit strength witnessed during the past few days,” said HSBC analysts last week. Nitesh Shah, head of commodities and macroeconomic research at fund manager WisdomTree, has a more bearish short-term view. He said the metal was likely to come under “near-term pressure because of macroeconomic headwinds”.
The long-term outlook for the metal is clear, given the need for significant infrastructure for the energy transition, but there is disagreement among experts about the short-term price reaction from copper. Bob Brackett, managing director and senior research analyst at Bernstein, said the momentum around China’s reopening had “left us with almost no upside” on equities and commodities forecasts for the year.
The opposite view stems from the supply challenges above, cutting the availability of the metal just as China is coming out of Covid-19 lockdowns, the Lunar New Year pause and winter. There is also the prospect – raised by Brackett – that years of unfinished construction projects in China could finally be completed. Shah agreed, saying the government would favour this kind of stimulus and adding it was “very copper intensive”.
In the unlikely case that every building in the country that has been left half-done is completed, that would add 6mn tonnes of copper demand (compared to 14mn tonnes of refined copper usage in 2021).
Meanwhile, even though miners are seeing strong prices for copper they also have rising costs to manage. London’s biggest pure-play copper miner, Antofagasta (ANTO), is an obvious beneficiary of the confidence in China’s reopening, with its share price climbing 40 per cent in the past six months. Its outlook and 2022 results will be released later in the month.
While we are bullish on Antofagasta’s long-term prospects, it is already trading well above its five-year average forward price/earnings ratio, at 29 times. The smaller copper-exposed companies are less expensive – Atalaya Mining (ATYM) trades at 7.5 times 2023 earnings, albeit with a much smaller dividend, and Central Asia Metals (CAML) is at 9.2 times.
The advantage of a copper miner over an exchange traded fund (ETF), for example, is the dividend yield, although admittedly the ETF can’t have its operations shut down by a freak weather event or community blockade.
Trading high on low supply
Glencore (GLEN) chief executive Gary Nagle said in December that the company would not bring on extra copper supply in response to current price highs, even though it has plenty of brownfield growth options. “When the price is there and the world is screaming for the copper that it needs and we’re a few dollars away from demand destruction, that is the time that we will bring on this copper,” Nagle said.
“While we still expect the copper market to be in surplus for the next two to three years, we have recently lowered our estimate of the magnitude of surplus,” the HSBC metals analysts said. Shah at WisdomTree was more sceptical. “I wouldn’t be fooled by the surplus forecasts that are out there right now. Sure enough they’ll be switched to deficits [as the year goes on],” he said. Inventories are low so future deficits are likely to send the price further up, he added. “It’s almost impossible for [the energy transition] to be sustained with copper prices as low as they are.”
Further out, Macquarie Bank forecasts a supply gap from 2027, “reaching 3mn tonnes [a year] by 2030”.
This is even with the construction of a handful of major new mines. The bank’s commodities strategists said 1.9mn tonnes of new supply had been greenlit in 2021 and 2022, with another 1mn tonnes likely to come in 2023. Beyond that, the picture gets hazier – two of the three biggest projects in the pipeline this decade are Reko Diq in Pakistan and Baimskaya in Russia, and neither will be easy to build.
The former has been in development for 30 years and is now in the hands of Barrick Gold (US:ABX) and state authorities after Antofagasta accepted a $946mn payout for its stake. Baimskaya was forecast to cost over $8bn to build in 2021, and Russia is hardly the top choice for financiers right now.
Nagle at Glencore, while hardly an unbiased source, sees a cumulative 50mn tonne shortfall in supply between now and 2030. He said the project pipeline was effectively empty, at least among the other major miners. “If [the deposits] were there, our peers [would] be building them, but our peers don’t have them,” he said. “So, they’re not building them, and they’re not spending the money.”
