Global growth concerns have driven down prices of most major commodities in recent months, copper is no exception.
Despite the short-term pain, the experts agree copper has strong fundamentals. The question isn’t whether copper is headed for a supply shortfall – the consensus is that it is – the question is how long. This important detail will be determined by the macro environment.
Copper Price Shows the Power of a Tweet
When future historians attempt to explain the power of a tweet, they may well show a copper price chart from the first half of 2019.
Copper, long considered a global economic bellwether because it is used in everything from electrical applications to telecommunications to power generation, has always been more susceptible to macro concerns than other commodities.
The London Metal Exchange’s 3-month copper price has tumbled more than 10% since April 9, when the International Monetary Fund lowered its 2019 growth forecast on downside risks such as trade tensions and mounting public debt. On July 8, copper was trading at $2.67 per pound ($5,892 per ton), 9.8% down on the 2018 average of $2.96/lb ($6,530/t).
Copper’s downward trajectory picked up steam on May 6 after U.S. President Donald Trump tweeted a threat to raise tariffs on Chinese goods. Bloomberg has shown the close link between Trump’s tweets about the domestic economy and the Dow Jones Industrial Average. On the global front, copper and other commodities have ridden the wave of the U.S.-China trade war – a proxy for global growth concerns which has largely played out on Twitter.
This isn’t to say that micro factors haven’t had any impact on copper prices. On July 8, the 3-month price fell 0.2% after the LME reported that global stockpiles had reached 302,975 tons, the highest in more than a year. But for the most part, the copper price has been driven down on short-term factors such as trade tensions, U.S. dollar movement, and policy uncertainty in the U.S., Asia, and Europe.
Not Enough Projects to Fill Demand Gap in 2020
In the long run, even a prolongment of the U.S.-China trade war won’t be enough to prevent the price of copper from rising. That’s because the main driver of copper prices in the next three to five years is expected to come from the supply side.
Experts agree a supply shortage is coming. In April, CRU Group told the World Copper Conference in Santiago, Chile that it sees the copper market moving from a 60,000t surplus in 2019 to a 41,000t deficit in 2021 and 270,000t deficit by 2023. It’s worth noting that this is actually a downgrade from CRU’s earlier estimate, made last year, that there would be a 630,000t deficit by 2023.
Copper Supply Deficit and Surplus
Morgan Stanley predicted in February that copper would move into deficit by the end of 2019, even as demand slows. “A year of weak grades at major operating mines more than offsets limited growth from green and brownfield projects, resulting in shrinking total mine production through 2019… Demand growth should slow versus 2018, but anything above 0 percent is sufficient to tighten the market, jolting it from its finely balanced state into outright deficit.”
The consensus, backed by CRU, is that supply will be impacted by declining ore grades, reserve depletion, and a lack of new mines in the pipeline. However, CRU did say in April that the copper market looks “considerably better supplied in the medium-term than it did a year ago”, thanks to board approval of projects and expansions including Anglo American’s Quellaveco project in Peru and Teck Resources’ Quebrada Blanca mine in Chile.
Even if more projects get approved, there will be a supply gap. As Chile’s state-owned miner Codelco, the largest producer of copper on the planet, has noted: “even developing all probable projects would not be sufficient to close the gap.”
As the supply shortage takes hold, micro factors should outweigh any lingering macro factors. The World Bank predicts the copper price will average $2.94/lb ($6,490/t) this year, increasing at a rate of around 0.9% per year to $3.10 ($6,838) by 2025. WoodMac says the price will hit $3.30/lb ($7,275/t) by 2028, based on the estimate that greenfield projects will need to fill an estimated 4.8Mt supply-demand gap by then.
EVs a Copper Game-Changer in Long-Term
Looking to the mid-2020s and beyond, the copper price could continue to move north thanks to increased demand fueled by electric vehicles.
EVs cannot function without copper, which is used throughout the vehicles, charging stations, and supporting infrastructure because of its durability, high conductivity, and efficiency. According to Copper Development Association Inc., a conventional car contains 18-49 lbs of copper. By contrast, hybrid electric vehicles contain 85 lbs copper, plug-in hybrid EVs 132 lbs, battery EVs 183 lbs, hybrid electric buses 196 lbs, and battery electric buses 814 lbs.
By CRU’s estimates, EVs will go from accounting for a negligible amount of copper demand in 2015 to 1.9Mt per year by the end of the 2020s and 5.2Mt/y by the year 2035. This is consistent with J.P. Morgan’s prediction that hybrids will account for 23% of all global vehicle sales by 2025, up from 3% in 2016, and fully electric vehicles will rise from 1% to 7% in the same period. By 2030, J.P. Morgan expects EVs to have a 59% market share overall, with pure internal combustion engines selling mostly in emerging markets.
No Need to Get Rid of Your Old Car Just Yet
Fortunately for copper bulls, the price for the metal is likely to head upwards well before EVs become the norm on our roads. At this stage, it’s anyone guess when (or if) the United States and China will resolve their trade differences or what the global economic picture will look like in three to five years. But macro considerations can only hold sway for so long. On the supply-demand front, the overwhelming consensus is that copper is headed for a deficit – and when it reaches that point, it will be hard to stop the copper price from rising.
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