Copper: an outlook on global supply and demand

08 November 2017

Copper is currently in a supply deficit which is likely to increase over the next three years. Prospects of a Chinese economic recovery, rising demand from electric vehicle manufacturers and US infrastructure plans announced following the election of President Trump are all driving copper demand. Meanwhile, labour disruptions, declining ore grades and a lack of new capacity are constricting supply, thereby resulting in a tightening market. In our latest bulletin we bring together some of these indicators and assess their insurance implications.

Supply side issues took the centre stage in Q1 2017 when production was disrupted in some of the major copper mines globally. These disruptions, together with capacity constraints, declining ore grades and delays to new projects have aggravated supply concerns. 

According to The International Copper Study Group (ICSG), global copper production is estimated to have declined by nearly 3% in the first five months of 2017.
Chile, the world’s biggest copper producing country, registered a 10% decline in production due to 43 days strike at Escondida (the world’s largest copper mine) and lower output from Codelco mines while the 21 day strike at Peru’s Cerro Verde mine also disrupted the copper output. 

In Indonesia, ongoing disputes between Freeport McMoran and the Indonesian government over the company’s contract to work in the country saw the government enforce a temporary ban on concentrate exports from the Grasberg mine in January 2017. The ban was lifted three months later which saw the government grant a six month permit allowing Freeport to resume copper exports. As a result of the company furloughing thousands of workers earlier in the year, violent protests erupted in May. The Grasberg mine itself is estimated to contribute ~3% of the global copper supply and the ongoing disputes in 2017 are expected to have seen a 5% decline in production.

In October 2017, following months of negotiations, Freeport McMoran relinquished a 51% share to the mine to the Indonesian government marking a victory for President Joko Widodo as the country paves the way for a new era of resource nationalism implementing new mining legislation that requires foreign companies to divest a majority stake in their Indonesian assets. 

In the first half of 2017, Canada and Mongolia also registered declines in production of 20% and 21% respectively, primarily due to lower ore grades. US production declined by nearly 11% primarily due to lower ore grades, reduced mining rates and unfavourable weather conditions. 

COPPER PRICE ANALYSIS 

Steep capital expenditure cuts since copper prices slumped in 2014 has negatively affected the development of the copper project pipeline, which according to Bloomberg Analysis, will take some time to recover. This has been exacerbated where existing producers have prioritised the production of their most profitable tonnes, rather than maximizing volumes, in order to alleviate pressure on their balance sheet. 

This dynamic does not appear to be set to change in the short term. Expansions and new project plans are reported to be facing reluctant lenders, political disputes and technical obstacles such as restrictions in water licencing or electricity allocation resulting in project delays. According to CRU Group, a UK research company, only six major projects to build new mines or expand existing operations will be completed by 2020.

Copper: an outlook on global supply and demand

COPPER DEMAND BOOST

The demand outlook for the red metal remains positive with expectations of a recovery in Chinese demand. This has been driven by President Trump’s plans to boost spending on infrastructure and construction, depreciation of the US dollar and the rising use of copper in electric vehicles and other electrical applications. 

In anticipation of this rise in demand, the copper market welcomed the election of Trump with a price rise of nearly 2% in late 2016 which marked its highest level since September 2015. The 10 year, USD 1 trillion infrastructure plan revealed by Trump aims to revamp the nation’s infrastructure network with prospective investments in transportation, energy infrastructure and other traditional types of projects. 

However, experts have expressed mixed views on the real impact of the US infrastructure plan on the global copper demand so the primary boost is expected to come from the recovery of the Chinese economy as the country continues its transitions towards a domestic demand driven economy. 

The ICSG expects world refined copper usage to increase nearly 2% in 2017 and 2018 in the wake of better prospects for global economies, particularly China, where copper is essential to economic activity and rising technological adoption in society. China’s retail and industrial sector witnessed growth of nearly 10.4% and 6.9% y-o-y respectively in first half of 2017. 

Growing use of copper in China’s power grid, which accounts for nearly half of China’s total copper requirement, along with healthy growth of high-technology and equipment manufacturing industries, has principally driven demand for copper. 

China’s ambitious USD 4 trillion One Belt, One Road (OBOR) infrastructure development plan, aimed at developing trade corridors across Asia, Europe, Africa and Middle East will further drive demand. IMF has recently revised China’s GDP growth forecast for 2017 and 2018 to 6.7% and 6.4% respectively, reflecting the high levels of public investment in the country which augurs well for the steady and continued copper demand in the country, one of the biggest consumers of the metal globally. 

Other notable factors which are expected to drive the demand of the red metal include the rising production of electric cars, which use four times the amount of copper than a vehicle with a traditional combustion engine. According to International Copper Association, copper demand from electric vehicles is expected to be nine times higher by 2027 from the current level of 185,000 tonnes. In addition, depreciation of the US dollar in comparison to the currencies of Peru, Chile and China (the key copper producers) could also lead to higher demand for copper from these producers in turn translating to higher prices. 

Tightening of supply is further evidenced from the fall in copper inventories at London Metal Exchange and Shanghai Futures Exchange warehouses.

COPPER DEFICIT 

As the global copper deficit intensifies and the price outlook remains strong, miners can be seen to focus on the expansion and development of new projects to meet increased demand. Production from brownfield expansions at Escondida in Chile, the restart of Glencore’s African copper operations, First Quantum Minerals’ new Cobre Panama mine and OZ Minerals’ construction of the Carrapateena copper mine in South Australia are expected to come online and increase output in the future. 

Some metals and mining analysts remain optimistic on copper and anticipate that the significant copper deficit may continue, a view supported in a recent McKinsey Global Institute report which signalled strong growth for copper over the next two decades and alongside a depletion of copper ores after 2025 further exacerbating constrained supply. 

On balance we see a strong outlook for copper and expect to see an increase in both greenfield and expansion projects getting the green light in the coming months

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contact Harry Floyd
Partner, Mining harry_floyd@jltgroup.com