The copper bull market is far from over


Copper has been one of the biggest winners in the commodities market since 2020.

Not only is this shiny red-colored industrial metal a vital part of our economic growth, it is also imperative for the global transition to sustainable energy sources.

China, the world’s largest consumer, has made reducing carbon emissions a priority, aiming to reduce its carbon intensity (emissions per unit of GDP) by more than 65% from 2005 levels by 2030. D ‘ by 2060, it wants to completely neutralize carbon emissions.

In the United States, the Biden administration has set a goal of having 100% electricity without carbon pollution by 2035, then carbon neutrality by 2050. The American climate plan would require that vehicles Electric vehicles account for at least half of the country’s new car sales in 2030.

Since the manufacturing process for electric vehicles is copper intensive (in fact, it uses 4 times more copper than a regular vehicle), the demand for copper has increased at an unprecedented rate with no signs of slowing down.

Meanwhile, wind power and solar PV systems have the highest copper content of any renewable energy technology, making the metal all the more important to achieving our climate goals.

According to the Copper Alliance, wind turbines require between 2.5 and 6.4 tonnes of copper per MW for generator, wiring and transformers. Solar PV power systems use around 5.5 tonnes of copper per MW.

Search by Fitch Solutions shows that green demand from the electricity and renewables sector as well as automobiles will each account for 7.9% of total copper demand by 2030.

Due to greater energy transition, Fitch predicts that “green copper” as a percentage of total copper demand will increase from around 5.6% this year to 15.7% in 2030.

From a forecast of 1.4 million tonnes in 2021 to 5.4 million tonnes in 2030, Fitch expects average annual growth in green copper demand of 13.0% year-on-year over the next 10 years. As expected, the two most important areas of green copper demand growth will be renewables and vehicle electrification, the company said.

Copper rally

Economic growth often goes hand in hand with an increase in industrial activity, and as nations around the world continue to wave infrastructure investment, demand for copper and other metals will increase.

According to Cochilco, the copper commission of Chile’s largest producer, global copper demand will reach 24 million tonnes this year, up 2.4% from 2020, and 24.7 million tonnes for 2022, an increase by 3%.

Driven by robust industrial demand, copper prices hit an all-time high of $ 4.77 / lb in the second quarter of this year. From its low of $ 1.94 / lb in early 2016, this represents a 150% rebound in five years.

Five-year copper spot price. Source: Kitco

Even though copper – like many other commodities – has seen some decline, the base metal is still at its highest level in a decade.

Some of the largest commodities trading companies and media remain bullish on copper as demand is likely to accelerate during the global energy transition.

“High demand expectations, especially the push to electrify the transport sector, as well as an absence of new mining investment are likely over the next few years to push the market into a deep and price-friendly deficit,” Said Ole Hansen of Saxo Bank.

Goehring & Rozencwajg, who specialize in investing in natural resources, believe the current cycle will ultimately push copper prices up, possibly even above $ 10 / lb. Justifying this aggressive price target, the New York-based research firm referred to the last great copper rally, which saw the metal rise sevenfold from its 1999 low of $ 0.61 / lb to 4. , $ 57 / lb in 2011.

“Our models tell us that the fundamentals are much better today than they were during the last bull market. Copper stocks were also strong performers. The average copper mining stock, as measured by the COPX ETF, is up almost 100% year-on-year and 20% year-to-date, ”wrote Goehring & Rozencwajg in their latest market commentary.

He also argued against the bearish case that economies such as China over-consumed copper, pointing out that such a conclusion is drawn by comparing a country’s copper consumption with real GDP.

Instead, using a “cumulative installed copper to GDP” measure, the report finds that “China may need to consume nearly 75% of global supply to install enough copper to support an emerging economy. middle income. “

“We first made this argument in 2014, when Chinese demand for copper was 45% of global demand. Last year China accounted for 58% of global demand and we believe there is still some way to go, “said Goehring & Rozencwajg.

Supply reduction

The Goehring & Rozencwajg report also pointed out that copper investment recommendations have mostly focused on these upward trends in demand, and the supply side of the equation is only just starting to be taken into account.

“While we believe demand remains extremely bright, we continue to believe that the next stage in the bull market will come once investors realize the widespread supply challenges ahead,” he writes.

The Covid-19 pandemic has already had a noticeable impact on global copper production due to work disruptions and mine closures, resulting in an 80,000 tonne shortage of supply in copper mines compared to the last year. Things should be back to normal this year, so 2020 is likely to be just a slight bump in the road.

The real concern, however, is the inevitable depletion of existing copper mines – a problem that has been brewing in the industry for over a decade.

A shortage of new copper discoveries and capital investment for mining development in recent years means that once an existing mine is depleted, its output may not be replaced in time to meet growing demand.

Source: S&P Global Market Intelligence

Additionally, since 2000, most reserve additions have come simply from lower cut-off grade and lower grade ore extraction as prices increased (i.e. copper from Escondida in Chile), a practice that might not be feasible for geological reasons in the coming cycle, as argued by Goehring & Rozencwajg.

Copper deficit

Although new projects are coming online around the world (DRC, Panama and Mongolia), they will only compensate for the depletion of other existing mines, resulting in stagnation in the overall growth of the mining supply.

It is also important to note that two political events that occurred in the second quarter of 2021 could negatively affect copper supply in the future.

In Peru, the new left-wing government led by Pedro Castillo is seeking to impose a 70% tax on copper mining profits, which would discourage further spending on existing and future projects.

Following Peru’s lead, Chile also proposed legislation that would tax copper mining profits at 75%.

While these new mining taxes have yet to be enacted, they are rapidly gaining ground in Peru and Chile, the first and second largest copper-producing countries, respectively.

“Our research strongly suggests that supply growth, which has been minimal since 2016, will continue to disappoint,” said the Goehring & Rozencwajg report.

As such, Acuity Knowledge Partners, formerly a member of Moody’s Corp., predicts a growing gap between supply and demand that could reach 8.2 million tonnes by 2030.

Therefore, despite a lukewarm market in recent weeks, investors continue to monitor and take positions in copper stocks. The outstanding shares of COPX are up 319% so far this year and 640% from the same period last year as investors rushed into space.

Mining companies with high quality copper assets will continue to attract investors, especially after the recent period of consolidation which presented an attractive entry point.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage resulting from the use of this publication.

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