Oroco’s stock price suffers from (1) the recent copper price selloff and (2) the slow delivery of drill data as the drills continue to turn. To date, the ultimate size of the resource is not visible and as management has correctly articulated, they are on the journey to establishing a larger resource.
This post recognizes that all the drilling so far has confirmed the resource in the North Zone, found a new yet to be defined Brasiles deposit and from my point of view, the IP and step put drill program will over time resolve this issue.
I am not concerned as I expect North Zone can easily double to 600 million tons, or more, South zone will have a meaningful high-grade core, and Brasiles will be a surprise to the upside. In any case, the minimum goal is 700 million tons of decent grade, and I am very comfortable they will beat this target handily.
This post is a discussion of copper demand that drives copper price, as copper price also being also a key driver of Oroco’s stock price.
First let’s look the basics of price and warehouse inventory data.
What we see is a steady price climb through the pandemic, and then a recent collapse.
Above we see the 5 year LME warehouse stocks, if we were to graph the peaks and valleys, we see a trend to shortage and only in the last weeks a bit of a rise, as can be seen in the 30 day LME chart below.
In my view the slight uptick in the LME levels are not enough to warrant the recent drop in copper prices, especially when one can see the opposite in the Comex warehouse inventory as shown below.
So, if the inventory is not really building much, and the long term trend is heading to shortage, then what is going on?
I have found very good artile,
https://seekingalpha.com/article/4522319-freeport-mcmoran-doctor-copper-makes-a-house-call focused on Copper demand and focused on Freeport, and the copper demand section was particularly good.
I have copied important parts of this analysis as relates to copper with my edits where I view as useful for understanding the future of copper. The purpose of this analysis is to understand how short the window might be for investing in the copper sector before is rises again and also in Oroco, as the current price is very attractive.
As such, my thoughts are as follows:
- Copper, the key enabler of the energy transition and building block of modern society, has fallen -32% in recent months. The market fears Dr. Copper is signaling a global recession, and copper is selling off in anticipation of a recession. My view is the fear of a recession is causing a selloff of copper. The actual supply and demand - a tiny imbalance - could tighten significantly in the next 6 to 12 months.
- A recession by definition, is a shortage of jobs. We do not have that at all, even with interest rates rising. For this reason, while I understand inflation from supply chain disruptions and high oil prices may lead to less consumer activity, and that higher mortgage rates will hurt the housing market, I am not convinced we have a repeat of the 2007 crash or other structural bank crashes. I think wages will rise to offset higher costs (Inflation) and we are not looking a huge loss of economic activity.
- China is the world’s largest consumer of copper at roughly 50% of global consumption. As such, we need to understand the drivers in China and this note is an attempt to do so.
- The greatest fear is a dramatic downturn in the Chinese real estate market. Surprisingly, real estate accounts for only 5-10% of China’s future copper needs. This is really interesting, as then it means a 20% decline in housing in China only means a 1 to 2 % decline in Chinese copper demand, that is easily made up in the transport sector grown as illustrated later in this report.
- Demand in China will be dominated by infrastructure, transportation, and durable goods. The energy transition, rising living standards, and tight supply conditions point to bullish conditions for copper mining into the next decade.
- Sovereign nations, China inclusive, want to decouple from the need to purchase oil or gas. This will drive solar, wind and electric vehicles faster than we have seen in the past few years.
- Europe really feels this now, and we will see a faster move to electric cars than we ever expected due to Russia's invasion of Ukraine. In fact, in Europe they have set a target for stopping the produciton of internal combustion engines.
- The Automotive sector will put a lot of pressure on copper inventories in the coming 6 to 12 months.
From all of the analysis below, it is my view that copper prices can rebound – A LOT - in 6 months to a year. Please read the end of the article where I outline why I think this is near term.
China When it comes to copper, China ultimately determines market conditions given that it accounts for roughly 50% of global demand. For a sense of China’s future demand growth potential, the following image from a recent
Canary Media article highlights its massive energy transition plans. Keep in mind this was before high oil prices and what we see is (1) China supporting EV’s and (2) China shifting to massive amounts of wind energy. My personal view is that the Chinese goal is to consume ever less petrol and reduce oil imports. Expect Europe to follow in the coming 12 months with ever more offshore wind, now that they see how vulnerable they are to Russian Gas restrictions.
Chart: Canary Media/Source: Global Wind Energy Council For perspective on Chinese renewable power demand for commodities generally, the following quote is from my
January Rio Tinto report and pertains to wind power.
Steel will play an important role in all renewables, including and especially solar and wind. Each new MW of solar power requires between 35 to 45 tons of steel, and each new MW of wind power requires 120 to 180 tons of steel.
While the above image speaks directly to steel demand growth from wind installations, copper is the ultimate enabling metal in generating and connecting renewable energy infrastructure into the global economy. China is in full top-down control of its long and massive energy transition plan. This creates high visibility into future demand growth. The energy transition vector should offer exceptional growth for copper demand into the foreseeable future, both in China and across the globe.
The primary demand-side fear in the market emanates from China’s real estate correction, which has been material and is ongoing. Interestingly, real estate is projected to account for only 5-10% of China’s copper demand over the coming decades. This can be seen in the following chart from a study published by Wiley in the
Journal of Industrial Ecology. Forecasted real estate copper demand is represented by the grey area (Buildings).
Source: Wiley’s Journal of Industrial Ecology In fact, the Chinese real estate top is in the rearview mirror from a copper demand perspective. This can be seen in the grey section above and in the detailed Buildings category breakout below. Please note that the left-hand side vertical axis scale on each chart may differ. On the summary chart above and on the final Infrastructure chart below, 2.0 on the vertical scale equates to 20 million metric tons of copper (1e7 on the left axis). Conversely, in the first three charts to follow below, 2.0 would equate to 2 million metric tons of copper (1e6 on the left axis).
Chinese Real Estate: Copper Demand Forecast Source: Wiley’s Journal of Industrial Ecology Notice that copper demand for Chinese real estate decelerated rapidly in the 2017 to 2020 period. Infrastructure, transportation, and consumer durables are now the dominant forces behind Chinese copper demand growth. These forces alone account for an estimated 80-90% of future Chinese copper demand. Projections for each of the three segments driving copper demand growth are provided below with a brief comment following each chart.
Chinese Transportation: Copper Demand Forecast Source: Wiley’s Journal of Industrial Ecology Notice that transportation demand was expected to reach a step change higher in 2021 at the time of this study in 2019. The step change higher has in fact occurred, not just in China but across the globe. What is notable is that transportation demand is projected to be relatively stagnant through mid-decade, which is likely to prove quite conservative now that high oil prices and driving emergency sovereignty.
When you look carefully at the two charts above, a doubling of Electric Vehicles in China would be almost 6 % of total automobiles and will average 2.6 times the amount of copper than a normal car. If this happens, this adds 10% of copper demand to the above chart in 2023. This should more than cover any decline in the housing market.
Transportation alone is projected to consume over 5x as much copper per year as real estate by the end of the forecast period. (in 2019) The core question is how fast will plug in hybrid and EV autos and trucks be accepted.
The second factor to realize is the supply chain shortages have created in the USA an 11 million new auto deficit. The rental car companies cannot get new autos and are now keeping their cars twice as long. Consumers cannot buy new cars in the USA and are driving up the used car prices. Once the supply chains stabilize, expect the automakers to run flat out for several years. These 11 million internal combustion cars not made in the USA over the last two years represent 253,000 tons of copper not used. Multiply this by 2 or 3 for the rest of the world is a fair assessment in my view. Convert some of this pent-up demand to electric vehicles the impact in the near term is very high.
Chinese Consumer Durables: Copper Demand Forecast Source: Wiley’s Journal of Industrial Ecology Consumer durable product demand in China is expected to generate exceptional copper demand growth throughout the forecast period. This growth vector should offer upside surprise potential given China’s low per capita copper consumption, which is estimated to be half that of other industrialized countries (such as Japan and South Korea). Again, while this is meaningful, the auto sector today is consuming more copper than this sector.
Chinese Infrastructure: Copper Demand Forecast Source: Wiley’s Journal of Industrial Ecology Finally, infrastructure is expected to account for 50% of total Chinese copper demand. This looks to be an exceedingly high-visibility growth channel as highlighted in the wind power installation image at the beginning of this section. Recent news flow confirms infrastructure to be China’s primary growth engine both today and into the future. The following quote from a major
Chinese news organization,
South China Morning Post, highlights China’s infrastructure growth intentions (emphasis added).
China is racing against time to rescue its coronavirus-hit economy with a renewed push of debt-fueled infrastructure investment after its local governments set a record for bond issuance in June.
To wrap things up on the key Chinese demand question, the following image displays China’s forecasted copper recycling capacity. Given that copper is reusable, the lack of recycling potential until the middle to latter half of the 2030s further supports extremely bullish supply/demand conditions over the foreseeable future. Please note the vertical scale differences in the next image.
Global Growth Opportunity While global infrastructure growth and the energy transition are highly likely to feature China at the core of demand, the fundamental trends underlying the above Chinese copper demand projections apply broadly across the globe. The following table from Citi Research’s
Copper Book: 2021-2030 Outlook .
The most important columns are the final two on the right. Copper is highlighted in blue. Notice that copper is projected to account for 28% of the total value of incremental metals demand resulting from decarbonization plans through 2050. The profit potential is highlighted by the fact that copper accounts for only 8% of the expected incremental tonnage demand growth.
Please keep in mind that these estimates are for incremental demand from decarbonization between 2020 and 2050. This is in addition to baseline demand which closely tracks global GDP growth. Citi estimates incremental copper demand over the coming thirty years to be near 0.4 billion metric tons (column A).
This level of incremental demand over thirty years would average 13.3 million metric tons of additional copper demand per year. For reference, global copper demand is currently in the neighborhood of 21 million metric tons per year. Stunning. I view the Citi incremental copper demand estimate as reflecting the desired level of energy transition to be achieved by global leaders and institutions. Meaning, I view global policy initiatives as unequivocally supporting an energy transition to be implemented as quickly as is practical given the realities of supply constraints.
The following Wood Mackenzie chart from a recent
Kitco article illuminates the desired energy transition trajectory and the realities of current supply chain constraints. I view the desired global transition pathway as being captured well by the Accelerated Energy Transition or AET-2 line in the chart.
Source: Wood Mackenzie Notice that the AET-2 line equates to roughly 13.3 million metric tons of additional copper demand per year in the 2026 to 2028 time period and onward, as was suggested by Citi’s incremental demand estimates. As a result of the energy transition, it is highly likely that global policy initiatives will exert material upward pressure on copper supply well into the foreseeable future.
Now we have no idea as to what the detailed assumption of AET-2 might be, but we do know high oil prices and the desire to not purchase energy from Russia have the potential to eclipse any green incentives.
The energy transition
was the top global priority.
Now it the priority in Europe and elsewhere to import less oil and gas, run coal plants and maybe even re-open nuclear plants. Not to mention more solar and more wind.
As a result, the energy
transition panic should support a strong copper price environment which is required to incentivize a substantial increase in copper supply. Higher prices are required given the extraordinary risks and time frames involved in bringing new copper mines online and into full multi-decade production. In fact, the current supply shortfall in relation to the desired energy transition pace is largely due to the depressed price of copper in recent times.
Copper Technicals The technical price action in copper highlights the depressed pricing environment since the 2006-2011 peak. While pricing has been depressed for some time thus limiting new supply growth, the long-term sideways price action has formed what should be an exceedingly strong support base for the future. This is especially the case given the aforementioned excess demand emanating from the energy transition. The following
20-year monthly chart speaks to copper’s long-term support levels.
Copper 20-year monthly chart (Created by Brian Kapp using a chart from Barchart.com) Notice that copper carved out a large topping pattern with extreme volatility in the 2006 to 2011 time period. The rapid price runup into 2006 and subsequent peak in 2011 was primarily driven by Chinese demand, which roughly doubled between 2006 and 2016.
The subsequent demand deceleration mid-decade caused by China’s real estate correction (Buildings in the previous charts) is clearly visible in the chart above. The price of copper sold off in advance of this major Chinese deceleration and bottomed coincident with the reduced Chinese demand between 2015 and 2019. The following 10-year monthly chart begins to place the current trend in context.
Copper 10-year monthly chart (Created by Brian Kapp using a chart from Barchart.com) Please note that the green lines in the charts represent key long-term support levels, while the orange line represents all-time high resistance. The 10-year monthly chart above depicts a well-defined, long-term W bottom formation, which should offer exceptionally strong support in the $2.95 to $3.30 price range. With copper trading near $3.40, it is sitting at the top end of the long-term support zone. The 5-year weekly chart below provides a closer look at the recent uptrend.
Copper 5-year weekly chart (Created by Brian Kapp using a chart from Barchart.com) Copper is now sitting on its 200-week moving average (the grey line) which happens to coincide with the upper end of the long-term technical support zone (the upper green line).
Copper is clearly overextended to the downside in the short term as evidenced by the velocity of the price collapse seen in the following 1-year daily chart.
Copper 1-year daily chart (Created by Brian Kapp using a chart from Barchart.com) The 50-day moving average (the gold line) is 23% above the current price. Please keep in mind that copper is a primary industrial commodity at the heart of modern society. The downside overextension combined with copper’s proximity to major support levels and robust demand
outlook suggest that the majority of the downside potential is in the rearview mirror Copper Price Forecasts The following table provides a breakdown of the copper price estimates used in the January Rio Tinto report. The data was compiled from Citi Research’s Copper Book: 2021-2030 Outlook and “
Copper price forecast: Will it surpass its all-time high?” by Nicole Willing. Highlighted in yellow the average copper price forecasts through 2030, and in blue the bullish Goldman Sachs forecast through 2025. Copper is currently trading near $3.40 per pound.
Created by Brian Kapp, stoxdox The Goldman Sachs forecast through 2025 offers a reasonable upside scenario as the copper supply and demand balance is tenuous
given the explosion of alternative energy demand. With copper trading in the low $4 range in 2021 with the same was expected for 2022, and higher prices forecasted through 2025 to 2030, the future should be very good. And rather soon, providing the recession is not severe.
In my view, the critical question of EV and hybrid demand in China is a huge factor in the near term. To put this in perspective, Tesla is the second largest EV producer in China. They are now producing 78,000 cars per month in China – almost 1 million a year. The total Chinese market is 21 million cars produced each year. All the other car builders in China and globally are bringing out plug in hybrids and EV’s.
As can be seen below, the impact can be massive. | | | Kg | Pounds Cu | Incremental Cu over Internal Combustion |
| Internal Combustion | 23 | 50.71 | | | |
| Hybrid | | 40 | 88.18 | 37.48 | | |
| Plug in Hybrid | 60 | 132.28 | 81.57 | | |
| EV | | 83 | 182.98 | 132.28 | | |
|
| | | | | |
An important idea to keep in mind that gloabally, 79 million automobiles are produced today. At present, globally the auto industry are producing 2.9 million hybrids, 2.4 million plug in hybrids, and 4 million EV’s. This totals 9.3 million out of 79 million.
This today represents 11.9 percent of all vehicle production globally.
If this were to double, then the LME stocks would drop by 20 metric tons per month. Please scroll up and look at the LME chart and ask one simple question – how long until the LME inventory is exhausted at this rate?
If the hybrid, plug in hybrid and EV production were to increase to 25% of all cars produced, the LME stocks would drop by 27.4 metric tons a month.
Likely more as charging stations need copper and wind and solar energy would continue to demand copper, increasing the copper deficit.
With Europe not buying Russia oil and gas, and high gasoline prices, I think the demand for these cars that use so much copper will be staggering.
My suggestion for Oroco stockholders is to watch the LME and COMEX levels and research the production plans for the global auto manufactures. I think there are over 100 models of Hybrids, Plug in Hybrids and EV’s planned next year. And their plans include prodcuction lines bein built, produciton rates beig established, and raw materials being contracted.
If you can see they are scheduling more than 11% of the cars as hybrids, plug in hybrids or EV’s, then invest accordingly! (And post here what you are finding!)
So, while I am certainly bullish on Oroco’s prospects, my request is that you the reader watch the new car production and particularly the hybrids, plug in hybrids and EV’s and post what you see.
May I suggest you visit local car dealers and find out what people are thinking relative to a new car purchase?
I visited an Audi dealer last week and they said 70% of new car buyers are interested in a Hybrid or EV. This is only a sample of one, so it may not be respective of the entire industry.
Please do some research and post what you are finding.
Thank you,,
Full disclosure – I am long Oroco and several other copper mining companies.