During a recent webinar, Mining Beacon was asked "do you think there will be a time that copper outperforms gold?". In a word, yes. Indeed, the red metal can be expected to outperform the yellow one in the near future, assuming a full-scale trade (or shooting) war doesn't break out first.
According to market lore, as noted in the Picks and Blasts blog of June 13, copper has a doctorate in economics (hence Dr Copper). There is a good reason for this belief as the metal's price tends to follow the global economy. This historically close relationship stems from the metal's importance in electrical applications (although silver has a higher thermal conductivity it is too expensive for most applications), so copper's consumption reflects the trend from rural to urban living (and a greater density of electrical appliances) and the growth in electric vehicles (EVs).
Copper prices have been volatile in the first half of 2019. This is primarily due to the trade dispute between the US and China, but also the impact of disruptions at several major copper mines.
As Keval Dhokia wrote in a recent article for S&P Global Market Intelligence (SPGMI), quite apart from the macroeconomic scene, the copper market's fundamentals "continue to suggest a revival in prices this year". A pivotal factor in the short run is China's increasing demand for mined and refined material, as well as its shift away from imported scrap as it seeks to focus on less-polluting forms of industry. This is crucial, according to SPGMI, given that China is ramping up 1.7 Mt/y of smelting capacity through 2021 and has also banned the import of Category 7 scrap beginning in January (increasing smelters' reliance on imported concentrate).
These trends have resulted in a year-over-year increase of 14% in China's imports of globally mined concentrates in 2018. Through May of this year, the increased crackdown on scrap imports has further increased concentrate import growth by 17% year over year to 9.1 Mt.
Copper Supply Factors
In addition to these favourable long-term demand, and short-term price, factors, copper can be expected to benefit from short to medium term constraints in mined supply. This is due to the continuing decline in ore grades and an historical under-investment in the supply pipeline.
SPGMI expects global copper head grades to decline again this year to an estimated 0.54% Cu, compared with 0.55% in 2018 and 0.7% less than 15 years ago. This is applying downward pressure on metal production and raising unit operating costs.
Moreover, analysis by SPGMI of country risk shows that copper mines tend to be located in countries with higher political risk relative to non-copper mines, and that disruptions will be of increasing importance as a result. For example, societal and political issues following a dispute with the local community in Tamil Nadu, India, have left Vedanta Resources Ltd's 400,000 t/y Tuticorin smelter offline since May 2018. A similar dispute between MMG Ltd and the local Peruvian community in the March quarter this year caused local output at the Las Bambas mine to drop 10% year over year, and Vedanta is currently in dispute with the Zambian government, leading to the recent seizure of its Konkola Copper Mines subsidiary.
Fortunately, there are now clear signs that long-term investors have recognised the opportunities in the copper market. Operators of primary copper mines increased capital expenditure by 17% last year to US$24.3 billion, and copper exploration budgets increased 22% year over year to US$2.1 billion.
The amount spent on acquiring copper reserves and resources also improved in 2018 after falling to an all-time low in 2017. According to SPGMI's Nick Wright, copper reserves acquired in 2018 more than quadrupled to 17.9 Mt from only 4.4 Mt in 2017. Last year's total was the highest annual tonnage acquired since the all-time record of 34.7 Mt in 2012. Acquisitions of copper in reserves and resources also rose in 2018, by over 1.5 times to 53.7 Mt from 20.8 Mt in 2017.
Mr Wright calculates that there were 131 acquisitions of major* copper reserves in the 10 years to end-2018, with 149.2 Mt of copper in acquired reserves changing hands at a total deal value of almost US$110 billion. These reserves were contained within 190 primary copper deals for a total of 605.8 Mt of copper in reserves and resources in deals valued at US$118 billion.
* Major deals are defined by SPGMI as having a value of at least US$10 million and 200,000 tonnes of contained copper.
Growing demand for copper by the EV industry, and the announcements of planned infrastructure investment by China and the US have revived copper prices since 2016. This trend seems highly likely to continue, and my bet is that the red metal will outperform gold as soon as next year.
The importance of copper, and its price performance relative to gold, is likely to be explored at a session on EVs at this year's Mines and Money conference in London on Wednesday, November 27.