For a long time, the constrained world copper reserves in development and the crucial role of this metal in the “green” economy have been key narratives of copper's investment case. Not only analysts but also producers believe this: last year, three out of four largest mergers and acquisitions were related to copper. Nevertheless, the copper price has been undergoing a correction for almost the entire first half of the year despite strong fundamental conditions for growth, and it reached a low of $7,900 per ton by the end of May, which is 16% lower than the peak of late January ($9,435 per ton). The decline is attributed to weak global demand and bearish market sentiment amid further US interest rate hikes, S&P Global Commodity Insights said in May.
REASONS FOR THE DECLINE: SLUGGISH MACROECONOMICS
Another major reason is the slowdown in the China’s economy accounting for 59% of global copper demand. The lifting of Covid-19 restrictions in China was considered a powerful trigger for the growth in demand for commodities. In its report published in early February, Norilsk Nickel anticipated that copper consumption in China would begin to grow from the second quarter when the decrease in the COVID-19 sick rate, as well as the positive effect of lifting the COVID-19 restrictions and the government support measures, become more substantial.
But the general market players were too optimistic this time, as the key area of copper consumption in China - the construction sector (accounting for about 30% of demand) - continued to show signs of weakness.
The initial impetus of the Chinese economy in the first quarter later began to show signs of the market cooling, said Federico Gay, senior analyst at Refinitiv and LSEG. “The copper price, as a barometer for global markets, usually increases during economic expansion times and decreases with lower industrial activity,” he says.
“After zero-COVID policy in China came to an end, optimism reigned, but the Chinese Purchasing Managers Index (PMI) contracted in April [and in May, it unexpectedly dropped to a five-month low – ed.]… while in other parts of the world inflation proved to be a bigger challenge than originally imagined, and a general stagnation of the economy was becoming clearer,” said Gay.
During a general slowdown in the Chinese industry, strong consumption of copper in the manufacture of air conditioners plays a big role, it accounts for about 10% of demand for this metal in China. According to CRU Group, domestic sales rose 10% year-on-year even amid an apparently weak real estate sector.
Outside of China, the decline in industrial production was expected in the first half of the year, while the recovery, especially in Europe, may be limited, said CRU Group’s Robert Edwards. “There are some pockets of demand strength, such as India, but it is still a small market,” he added.
In 2023, metal consumption outside of China is expected to be at the level of the previous year amid stagnant economic growth, Norilsk Nickel stated in its February press release. According to the company’s expectations, aggregate global copper consumption will increase by 2% to 25.4 mn tons in 2023, while the refined copper production will also rise by 2% to 25.2 mn tons despite protests in Peru.
REASONS FOR THE SLOWDOWN: SURPLUS INSTEAD OF DEFICIT
While the demand for copper was sluggish, the supply soon returned to normal after some weakness at the beginning of the year. This fact did not immediately affect forecasts, but changed the idea of the market movement vector.
In the first two months of 2023, production was quite heavily disrupted, especially with strikes at mines in Peru, but subsequently many of the issues have been resolved and mining industry is performing reasonably well on the whole, says CRU’s Edwards.
Chile is the biggest global copper producer that accounted for 5.2 mn tons in 2022, while Peru that produces 2.2 mn tons of copper a year shares the second place with the Democratic Republic of the Congo (DRC).
“We were counting on a deficit (in 2023), but the market is probably much closer to balance, if not surplus now,” Edwards says.
According to the Refinitiv’s data, while the refined copper balance was at a deficit of around 77 thousand tons during the first months of the year, a surplus about 80,000 tons is expected at the end of 2023, considering current variables.
The International Copper Study Group (ICSG) that expected a deficit of 114 thousand tons in the copper market at the beginning of the year, recorded a substantial surplus of 298 thousand tons at the end of July. This estimate takes into account only the actual data on the use of metal in China, without analyzing the change in unregistered stocks in this country, in particular, the inventories at the bonded warehouses (their forecasted change makes the surplus even more significant at 397 thousand tons).
Preliminary ICSG data suggests that global apparent refined copper consumption rose just by 4% in the first five months of 2023, while the production rose by 8%.
While the apparent demand in China (also excluding changes in unregistered stocks) rose by 9%, the consumption outside of China fell by 2%, mainly due to lower demand in the EU, Japan and the US, according to ICSG.
According to the ICSG estimates, primary production of refined metal increased in January through May by about 7%, and secondary production from scrap recycling increased by 11%. The growth is mainly driven by strong performance in China and DRC where new or expanded smelter capacities continue to be commissioned. The increase in output in these two countries (by 15% and 10%, respectively) offset the decline in Chile (by 6%).
“OVERHANG” FROM THE CONGO
At the time of sluggish demand, there was an “overhang” in the market due to the release of accumulated inventories of copper and cobalt at the major Tenke Fungurume mine in the DRC. The China’s CMOC Group Ltd made progress in April in settling a royalty dispute with the country’s authorities, paving the way for about $1.5 bn worth of metal into the market. The export of these volumes has been banned by the Congolese authorities since July last year.
Daniel Ghali, senior commodity strategist at TD Securities, estimates the backlog at 200 thousand tons, or about 1% of global supply, which is enough to shift the market balance from an expected deficit to an expected surplus. “Not to mention the fact that the mine is now operating as well, so you do have a lot of copper coming out of there, and it's coming out of there at a time that the market doesn’t actually need it,” Ghali says.
INVENTORIES ARE NO LONGER AN INDICATOR
Due to disruptions in logistics last year, demand generally prevailed over supply, and the available refined metal stocks almost dried up. Total exchange stockpiles (on the LME, SHFE and CME) fell to 4 days of global consumption by the end of 2022, which was the lowest level in 14 years, Norilsk Nickel specified. The inventories at the China’s bonded warehouses have slumped by 71% since the beginning of last year to 55 thousand tons, which is the lowest level in more than 10 years.
This year the trend of destocking continued. As of July 4, the stockpiles at the London Metal Exchange (LME) amounted to only 67.2 thousand tons. In particular, the stocks of copper of the Russian origin, which account for about 66% of the total volume of copper at the LME, have decreased. They fell from 52 thousand tons at the end of January to 22.7 thousand tons as of June 30; moreover, this decline occurred contrary to the trend (stocks of other Russian non-ferrous metals - nickel and aluminum - from the Russian Federation at the stock exchange are growing amid fears of sanctions and a general decrease in demand for base metals).
The bulk of exchange warehouse inventories is not backed by physical metal, which means that producers can withdraw them at any time, Gay explains. “Low stocks are usually, but not always, a bullish sign for copper prices,” he says.
However, there is an opinion that the traditional correlation between destocking in Asia and high demand for the metal has become a less reliable indicator. Bloomberg’s reporter Alfred Cang draws attention in his article “The Great Copper Stocks Mystery Puzzling Traders” to the mismatch between plummeting stockpiles and sluggish consumption and concludes that this mismatch is no longer a bullish economic indicator.
Copper inventories at the LME’s warehouses in Asia plummeted by almost 80% in June to 13.95 thousand tons, which is less than daily consumption in China. At the same time, domestic copper prices in China were even lower than the LME’s price benchmarks, which reflected the weak domestic demand in the absence of economic stimulus and the Chinese smelters' rising exports. According to traders interviewed by Cang, this can be explained by the changing conditions for warrant cancellation at the LME warehouses, or by the efforts to support the market due to limited inventory availability.
DECLINING FORECASTS
Due to rising risks of a recession and industry slowdown in China, copper prices will fall to $7,000 per ton in the second half of this year, the Chinese research company Antaike forecasts. As a result, demand in China will grow by just 2.7% this year, while outside of China, it is very likely to fall to the last year’s level, although low metal inventories will boost the prices to some extent.
Current forecasts by Citi and Goldman Sachs also suggest a copper price decline within three months to $8,000 and $7,750, respectively. CRU believes the copper price to be around $8,500 per ton in the third quarter.
S&P Global Commodity Insights lowered its annual forecast to $8,785 (from $8,830) after a price correction in May, although it believes that the weakening dollar due to a slowdown in US economic growth and a likely pause in the interest rate increase will support metal prices in the second half of the year.
According to FocusEconomics analysts, prices will remain close to current levels in the coming quarters. “The health of the Chinese industrial sector and prospective stimulus policies in the country are the main factors to monitor on the demand side,” they say in their report. “Supply-wise, adverse weather conditions and labor unrest at mines in Chile and Peru, as well as possible sanctions against Russian copper, pose upside risks,” FocusEconomics says.
THE “GREEN” FACTOR STILL IN ACTION
Anyway, the copper’s role in the “green” economy boosts the metal’s price. “Despite the general slowdown in business activity, the electrification of transport and the development of renewable energy projects will boost demand,” Nornickel believes.
“While China macro has been weak, actual copper demand has held up relatively well, helped by green energy applications, such as electric vehicles (EVs) and renewables, especially solar, domestically — and in the case of EVs, in export markets as well,” says CRU’s Edwards.
According to the ICSG, electric vehicles use about four times as much copper as internal combustion engine vehicles. Copper is required for batteries, windings and rotors used in electric motors, as well as for wiring, busbars and charging infrastructure.
Goldman Sachs noted in its July forecast that the rising usage in electric vehicles was “a key pillar of copper’s bullish story”. Due to its high conductivity and ductility, copper is an ideal candidate for transformation and transmission of electrical energy in electric vehicles, the bank says. Last year, EV production accounted for about two-thirds of the increase in the global copper demand, and over the next decade, electric vehicles could provide about 27% of additional copper consumption. Goldman Sachs sees demand for copper in this sector at 1 mn tons this year and it will rise to 1.5 mn tons by 2025.
However, Goldman Sachs writes that in the long term, the use of copper in electric vehicles may decline as the volume of metal per electric vehicle is likely to fall to 65 kg per unit by 2030, compared to 73 kg in 2022.
Demand for copper for the production of electric vehicles, “green” energy and developing power grids exceeds the production of the metal, taking into account both existing and future projects that are under development, Norilsk Nickel notes. The company expects that the deficit of copper may reach 5 mn to 9 mn tons by 2030.
Experts agree that before the end of the decade, the market will face a potential shortage of copper supply, and producers and junior companies will encounter obstacles while commissioning their projects.
Due to unsettled social issues in top-producing countries such as Chile and Peru, mining company shareholders have been skeptical about investing in mining development, Gay notes. The principles of long-term relationships between producers and local communities in these countries have not been established, that is why it is not possible to minimize disruption risks. “This has eroded the investor’s trust and possibly slowed down some necessary investments in the region,” he said. “Aging mines and depleting resources might act as a ticking bomb that will be harder to disarm as time passes by,” he warns.
Sergey Bondarenko for Rough&Polished
