Analyst says copper deficit is set to deepen
In 2010 I was sent by Bloomberg News to the Atacama Desert to deliver blow-by-blow news of a workers strike at the giant Collahuasi copper mine.
Each morning, I would leave my comfortable hotel room in Iquique complete with swimming pool and ocean views, and visit hundreds of workers who were camped in a state school and using the site to orchestrate protests in the Chilean desert town.
Bloomberg paid my expensive hotel bill back in 2010 because every pension fund, hedge fund and daytime investor in the globe had high stakes riding on commodities, copper equities or ETFs tracking the price of the LME or Comex. Chinese traders were using copper metal as collateral for loans. Any sign that the strike was going to end would send copper prices into a tailspin. The miners, emboldened by their apparent grip on the global copper market, downed tools for 32 days, ensuring I got a lengthy stay in the desert, and a ton of Radisson reward points.
LME prices rose from a monthly average of $3.76 a pound in October 2010, when the Collahuasi strike started, to an average of $4.48 a pound in February 2011, the highest on record. Buying copper on the strike announcement would have resulted in a 20% ROI. You would have quadrupled your money if you saw the start of the commodities super-cycle in your crystal ball in 2003.
The market this year seems a long way off the red-hot streak of 2011. Prices have slumped year to date. For sure, there have been declines in all asset classes as the world stares aghast at the prospect of a trade tariff war. But official warehouse inventories have climbed from 543,786 metric tons to 755,847 tons in the first quarter. Prices have historically shown a close correlation with official warehouse numbers, regardless of the fact that copper can be hoarded in unofficial locations. Add to the fact that the market is in contango — the term used for an adequately supplied market when copper is more expensive for future delivery than spot prices reflecting the cost of storage. So, should you be selling those copper-backed equities? Some signs say yes. But not so fast.
When looking at the underlying fundamentals, not much has changed in the copper market. Before Bloomberg, I worked at the London-based mining consultancy CRU, the industry go-to independent research house. CRU consistently forecasted less bullish prices for copper during the commodities super-cycle, calling the market environment that led to the slump of the last 5 years. CRU, last week, gave a new forecast, and it is incredibly bullish.
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The copper market will move out of a three-year surplus in 2018 to a deficit market starting next year, spurred by a lack of investment in new mine capacity. A slew of labor negotiations up for negotiation this year at Chilean mines might bring that deficit scenario forward. As such, CRU predicts prices will hover in the $3/lb-$3.25/lb range for now, before climbing higher.
CRU copper analyst Vanessa Davidson predicts an average 1% growth in new supply, trailing well behind world industrial production growth at 3% this year and 2.5% in 2019. New supply will arrive in 2019 through the expansion of the massive Grasberg mine in Indonesia and the start-up of a new mine by First Quantum Minerals Ltd. in Panama. However, these new sources of copper will not be enough to replace lost tonnage due to depleting ore grades and capacity closure. The market deficit is set to deepen through 2022, CRU said.
In addition to that, new demand sources for copper will increase at that point – from wind turbines and solar panels to electrical vehicles (EV). EVs will require 83 kilograms of copper, versus only 23kg in an internal combustion engine, according to producer Antofagasta PLC. Even with Chinese demand growing at a slower rate compared with the phenomenal double digit growth seen in the last decade, the increments in tonnage terms are much higher.
Ultimately, the financial drought that has decimated junior mining since 2012 is the reason why commodity industries stagger through boom-to-bust cycles. The market desperately needs new major orebodies unearthed, and in new locations. Collahuasi, the world’s second biggest mine in 2017, was first tapped in 1880. Another three of the Top 10 mines started their productive life in the 19th century, and another two started up in 1910. That said, the potential exists to find major new orebodies along well-known geological fault lines.
First Quantum is leading the way in this regard, by developing a major new greenfield project in Panama, and on a well-known geological fault line that provided Chile and Peru with its copper endowments in the Andes Mountains further to the south.
Take a look at some junior companies that are working along another major geological copper belt region – that of southeast Asia and Melanesia, or the group of Pacific Islands close to Australia. The same geology that resulted in Freeport-McMoRan’s Grasberg mine in Indonesia is likely to herald more major copper porphyry deposits, according to the U.S. Geological Survey. Consider the early stage exploration being done by Angkor Gold Corp. (TSXV: ANK) in Cambodia, which is sitting on a copper porphyry in a largely unexplored area. The same applies to Thunderstruck Resources Ltd. (TSXV: AWE), which is seeking a partner to drill a major copper deposit in Fiji. It’s of little surprise that Japan Oil, Gas and Meatls National Corporation (JOGMEC) is partnered with Angkor in Cambodia. JOGMEC’s raison d’etre is to ensure that Japanese industry is supplied with sufficient quantities of key commodity inputs.
If not, we will be back to the days when the financial community soaks up mine stoppage news, and sending journalists off for jaunts in the desert.
Matt Craze has covered commodity markets for more than 20 years, working as a researcher at CRU International, and for over 10 years as a ... <Read more about Matt Craze>