Global supply gap likely to be 8.2 mt by 2030, copper is a good long-term bet

June 03, 2021 4:00 AM

JP Morgan says the emerging demand sector will not “reach a critical inflection point until the second half of the decade. Green transition application of copper will rise from 1.4m tonnes in 2020 to 2.6m tonnes in 2025 and 4.5m tonnes in 2030.”

An official of Sumitomo Corporation global research, therefore, says: “Copper is currently looking for a new price equilibrium point... copper price level will rise further.”An official of Sumitomo Corporation global research, therefore, says: “Copper is currently looking for a new price equilibrium point... copper price level will rise further.”

By Kunal Bose

In the context of global recovery in steel demand and, therefore, of prices, Tata Steel CEO and managing director TV Narendran says, “Governments wanting to spend their way out of trouble and whether it is China or the US, one sees a lot of money being kept aside for investment in infrastructure” have been a major trigger. Narendran acknowledges that when Indian steel demand shrank big under Covid-19 impact in the first half of 2020-21, the surprising state-aided recovery in China opened a major outlet for our surplus production. Narendran’s steel-related observation about China holds good for copper and other metals, too.

This cannot be otherwise since China is not only the largest producer of the red metal, which finds application in construction to air-conditioners to electric vehicles, but it also uses well over half the global copper output. Besides its own production, in the first four months up to April this year, China’s imports of unrefined copper and related commodities were up 9.8% year-on-year.

Besides the China factor, re-emergence of the US and Europe as significant factors in copper consumption in a long time, investor faith that pledges by governments to achieve net zero emissions of greenhouse gases by 2050 will create a big incremental demand for the metal, major economies starting to return to normal economic activities and the US Federal Reserve’s dovish monetary policy have all helped in keeping the three-month LME copper price at the elevated level of over $10,300 a tonne.

At the same time, the most-traded July copper contract on Shanghai Futures Exchange is at 74,140 yuan ($11,638) a tonne. As pandemic-recovery optimism is growing in the world outside China, unfortunately not in India as yet, a natural corollary is the uptick in more spread out copper demand.

Copper continues to make sterling progress from a low of about $4,600 a tonne in March 2020. On April 29 this year when LME copper price breached $1,000 a tonne, the metal had made it to the highest level since 2011. In the progress of prices so far, all other ferrous and non-ferrous metals and also minerals have participated. For example, three-month aluminium is traded at over $2,485 a tonne, zinc at $3,061 a tonne and iron ore, though under Beijing pressure on commodity traders and steel mills, has slipped a tad below $200 a tonne. But where will copper prices be heading from here?

Before answering the question, let it be said that combination of Chinese consumption remaining intact, transition to green increasing copper demand and limited new mines development should keep the metal at an elevated level at LME. An official of Sumitomo Corporation global research, therefore, says: “Copper is currently looking for a new price equilibrium point… copper price level will rise further.”

A new International Energy Agency report says global copper demand could well double by 2040. But this is to happen against the background of only a few major copper mines in development. For a very long time, circular economy is being widely practised in the copper industry by way of recycling of scrap. But whatever be the volume of recycling, it could only supplement supplies in large volumes from smelters processing concentrate.

Not only is the pipeline of virgin mines development projects lean, but supplies from operating mines in Chile and Peru that together account for around 35% of global mine production are yet to recover from Covid-19 and weather-related dislocations.

To further add to ore supply problem, workers at BHP Billiton’s Escondida and Spence mines in Chile have struck work. When copper concentrate supplies are under pressure, treatment and refining charges (TC & RC), the source of income for standalone smelters, fall. In fact, the prevailing TC & RC is at a decadal low. This, according to analysts, is likely to lead many groups to advance smelter maintenance shutdown, resulting invariably in short-term constraints in refined copper supply.

Whatever positive impact some temporary smelting capacity resting may leave on prices, merchant bankers and trade officials believe that gradual opening up of a new demand avenue for copper as the world transitions to green technology will remain an important prop for the commodity for a long time. For example, an electric vehicle will need 84 kg of copper against 23 kg for an internal combustion engine. A single-wind turbine will require 3,629 kg. As of now, a consensus is not there as to how much copper will be needed as the world embraces green technology.

JP Morgan says the emerging demand sector will not “reach a critical inflection point until the second half of the decade. Green transition application of copper will rise from 1.4m tonnes in 2020 to 2.6m tonnes in 2025 and 4.5m tonnes in 2030.”

Goldman Sachs, however, believes that gradual changeover to green will lift copper demand from the emerging sector to 5.4m tonne by 2030. But, in view of new mines development failing to match rising smelter ore demand – it takes nothing less than five years to open a new mine – the world could be facing a copper supply gap of 8.2m tonne by 2030. Copper, therefore, is a good long-term bet.

A former FT correspondent, the author is now India Correspondent for Euro Money publication, Metal Market Magazine

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