The pressure on copper prices going forward will be highThe purpose of this post is to illustrate that the valuations for copper mines, copper developments and copper price will have wonderful upward pressure, allowing Oroco to be entering into sellers market for M&A activity that eventually will show up a Oroco's door. All very exciting.
To make this point real, I have copied an extract of the copper portion from a very thorough recent commodities report you can find th link at the end of this note. Here it is:
S&P Global Admits We Have a Copper Problem Copper prices have pulled back 35% since their all-time peak of $4.93 reached in the first week of March. The copper price rout was driven by fears of surging short-term interest rates, Chinese COVID lockdown policies, Chinese property developer woes, and global recession. Despite the pullback, near-term copper fundamentals continue to exhibit strength. Through May, worldwide copper demand grew 3.4% year over year. OECD copper demand grew by 1%, China (now 55% of world demand) rose 3.9%, and the remaining non-OECD world Goehring & Rozencwajg Natural Resource Market Commentary 31 grew a massive 7%.
In the latter group of countries, the most important to watch will be India. We believe India now sits where China did back in the late 1990s, just before its copper consumption exploded. If we are right, India’s copper consumption should begin showing pronounced strength. We can’t help but notice that India’s copper consumption grew by 30% year over year. Note that Inia is buiding subways, electifying Three wheelers, adopting green energy production and the middle class continues to grow.
On the supply side, mine supply growth remains subdued. As we mentioned in our previous letter, Chile’s production has exhibited pronounced weakness. For the first five months of 2022, Chile’s copper production has fallen 5%. Water restriction issues, declining ore quality, and social unrest were all highlighted as responsible for the shortfall. Nearly 25% of all the mine supply comes from Chile. It’s the poster child for all the major issues facing the copper industry today. In the lead essay in our 2021Q1 letter, “The Problems With Copper Supply,” we discuss the problems facing the Escondido mine in Chile—the world’s largest. Escondido’s problems are what’s facing huge swaths of the Chilean mining industry today.
Offsetting Chilean production disappointments was a surge in production from the Democratic Republic of the Congo (DRC). The ramp-up of the massive Kamoa-Kakula mine is now complete, having added 200,000 tonnes to copper mine production. Even with this increase, total global copper mine showed little growth. According to the World Bureau of Metals Statistics (WBMS), copper mine supply grew by only 1% for the first five months of 2022 compared with same period in 2021.
For the first six months of 2022, demand is running far ahead of mine supply. Reflecting this deficit, copper inventories have again rolled over. After bottoming at 165,000 tonnes at the end of 2021, inventories rebounded 300,000 by mid-May, but have since pulled back to 240,000 tonnes. When adjusted for days of consumption, inventories are almost as low as they were back in 2005, just before copper prices more than doubled.
In 2005, copper exchange inventories covered consumption by only two days. By the end of 2021, inventories had fallen to only 2.5 days of consumption, and at 240,000 tonnes today, inventories cover consumption by only 3.5 days -- see current LME warehouse trend:
https://www.kitcometals.com/charts/copper_historical_large.html#lmestocks_5years
Back in 2018, when inventories peaked out at 900,000 tonnes, inventories covered 15 days of consumption. Copper demand remains strong, supply continues to disappoint, and inventories continue to bump along at extremely low levels. We believe the weakness in copper prices (and all base metals prices) over the last several months represents another great buying opportunity. We see no changes in either the short-term or long-term underlying fundamentals.
Regarding the long-term fundamentals, S&P Global recently published a paper by Dan Yergin titled “The Future of Copper: Will the looming supply gap short-circuit the energy transitions?” The paper garnered significant amounts of press and makes for a very interesting read. The study warns of “unprecedented and untenable” copper shortfalls as suppliers grapple with copper demand that will double by the year 2035. The analysis constructs an extensive “bottom-up” analysis of the impacts of renewable energy given a 45% net reduction in CO2 output by 2035, and net-zero by 2050 (as outlined in the 2016 Paris Accords). Factoring in traditional copper demand growth from emerging markets like India, S&P Global concludes that copper consumption will double from 25 to almost 50 mm tonnes by 2035.
These numbers are truly incredible. Between 2000 and 2020 (a period that experienced surging Chinese demand), copper consumption advanced by 10 mm tonnes from 15 to 25 mm tonnes, or 2.5% per year. Based upon the S&P Global analysis, annual copper demand growth will double -- surging from 2.5% to more than 5% per year in the next 13 years.
The study takes an interesting approach to mine supply. S&P Global outlines two scenarios: a “High Ambition” scenario in which copper supply surges but still falls short of demand by 1.5 mm tonnes by 2035 and a “Rocky Road” scenario in which supply falls short of demand by a massive 10 mm tonnes by 2035.
After having studied their report, we disagree with both options: we believe their pessimistic “Rocky Road” scenario is still far too optimistic. S&P Global’s “Rocky Road” scenario assumes copper mine supply and scrap recovery grow from a combined 25 mm tonnes today to 39 mm tonnes by 2035, or by 3.2% per year. By comparison, between 2000 and 2020 mine supply plus scrap grew by only 2.5% per year. Given the huge depletion problem now gripping the copper mine base and the near total drop-off in new largescale mines (those greater than 300,000 tonnes of copper per year) to be developed over the next 10 years, we believe S&P Global’s expectations are far too generous. Their “Rocky Road” scenario still assumes copper mine plus scrap annual growth will average twice the yearly growth experienced over the last two decades.
Between 2000 and 2020, copper mine supply plus scrap grew 500,000 tonnes per year on average. The “Rocky Road” scenario assumes mine supply plus scrap growth will double to 1 mm tonnes per year between now and 2035. Given our analysis of current supply trends Goehring & Rozencwajg Natural Resource Market Commentary 33 (already painfully obvious in Chile), we believe even the pessimistic “Rocky Road” supply scenario will be impossible to achieve.
We do agree with their assessment that a massive gap is about to emerge between demand and supply that will only get worse as we progress through this decade. Back in 2016 we wrote a lengthy essay on how investors were completely underestimating the impacts of renewable energy on copper demand: “
To put these figures in perspective, over the last 15 years, copper demand has increased by an average of 500,000 tonnes per year—so renewables have the potential to nearly double annual copper demand. […] It is unclear how the world will meet these entirely new sources of copper demand. Given that copper mine supply has only grown by about 400,000 tonnes per year over the last 15 years, it is hard to imagine how the copper market can avoid shifting into a large structural deficit over the next several years.”
Back then, copper was at $2.20 per pound and investors were universally bearish. The looming gap about to emerge in copper markets, will not only push prices much higher but will also produce other interesting consequences as outlined by S&P Global: “The chronic gap between worldwide copper supply and demand projected to begin in the middle of this decade will have serious consequences across the global economy and will affect the time of the Net-Zero initiative by 2050. […] In the 21st century, copper scarcity may emerge as a key destabilizing threat to international security. Projected annual shortfall will place unprecedented strain on supply chains. The challenges this poses are reminiscent of the 20th century scramble for oil but may be accentuated by an even higher concentration of copper resources and the downstream industry to refine it into products.”
We are entering a new copper era. We have discussed extensively how copper markets are about to shift into long-term structural deficit as we progress through this decade. By contrast, the copper analytic community always believed the copper market would remain in structural surplus. The copper bull market has only started. Copper prices will potentially triple from here. Use the recent weakness in copper prices as a buying opportunity.
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