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Copper Forecast 2020: Will Demand Exceed Supply?

Dave Jackson Dave Jackson, Stockhouse
0 Comments| February 13, 2020

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Click to enlargeAn aerial view of Mina de Chuquicamata – a Chilean state-owned copper mine located at 2,850 metres (9,350 ft) above sea level just outside Calama in northern Chile. It is, by excavated volume, the largest open pit copper mine in the world and the second deepest open pit mine on earth. The huge hole was started in 1882 as a mine to extract gold and copper.(WikimEdia Commons).

Industrial economies need copper, and a lot of it. It is known as ‘man’s first metal’, and for over 10,000 years has been used in a wide range of applications…from architecture to coinage. Also frequently called ‘Dr. Copper’ due to its connection to economic cycles, it could be one of the most significant metals & mining trades of 2020, as most industry analysts expect a price jump for the metal as global demand recovers from seven-year lows around US$4,330 per tonne in January 2015.

An October 2019 report from the International Copper Study Group (ICSG) forecasts world refined production increasing by around 4 percent in 2020. IHS Markit sees copper prices rising upwards of US$6,400 per tonne in the first half of 2020, whereas Capital Economics is predicting a price hike in the range of US$6,800 per tonne by the end of 2020, then advancing to US$7,500 per tonne by the end of 2021, and finally moving on up to nearly US$10,000 per tonne by the end of 2025.

Bay Street and Wall Street analysts now believe copper prices will improve, especially in wake of Phase One of the US-China trade deal. Copper prices rose in December 2019 to their highest levels in seven months, highlighting how a more optimistic view of the world economy is supporting riskier corners of the market.

Earlier in 2019, the International Copper Association (ICA) commissioned a study to see what effects the global rise in renewable energy will have on copper demand. The answer? By 2027 demand will rise by 56 percent; meaning an extra 813,000 tonnes will have to be added to current production levels. Another 5.5 million tonnes will be needed by 2028, and that’s only for renewable energy applications like wind power, which grew 8 percent in the US in 2018. Electric vehicles (EVs) could be the major catalyst for surging copper demand, as EVs demand almost 10 times as much copper as their gas and diesel counterparts. By 2027, it’s expected that increased demand from EVs will send copper production even higher…to an expected 1.74 million tonnes per year for EVs alone.

The Case for Copper

The copper mining industry is a major contributor to the global economy. And, it’s more than just a mined metal – it provides good paying jobs and promotes a higher standard of living, especially in emerging economies. One tonne of copper brings functionality in 40 cars, powers 60,000 mobile phones, helps operate 300 computers, and distributes electrical power to 30 homes. The International Copper Alliance divides copper usage into four categories – electrical, construction, transport, and other. By far the largest sector for copper usage is electrical, at 65 percent, followed by construction at around 25 percent.

The vast majority of mining operations extract copper from the ground via open pit mines – the most efficient and cost-effective method of mining ore. For ethical investors and those concerned with mining operations leaving a carbon footprint, mining companies are taking new steps to reduce their greenhouse gas emissions. BHP Group Ltd. (NYSE:BHP) – The world's largest diversified mining group – recently committed $400 million over five years to reduce greenhouse gas emissions from its operations and mined commodities. As an example, BHP announced last year to switch two giant copper mines in Chile to solar, wind, and hydro sources in place of existing coal and gas power will cut energy costs by about 20 percent.

Renewable energy systems have a voracious appetite for copper, consuming approximately five times more copper than conventional power generation systems, making the base metal essential for any successful transition to fossil fuel alternatives.

Despite increased copper supplies required for the new green economy, there are some questions around where this new metal may come from.

Copper projects are notoriously massive in scale and size, and the direct pipeline to start-up projects is the lowest in over a century. As a result, many analysts are expecting that the long-anticipated supply crunch might come sooner than expected.

Copper Consumption

So, from where is all this additional copper going to come? Because it is an industrial metal critical to the manufacturing and construction industries, copper is extremely sensitive to investors’ perception of global growth. The metal is closely tied to China, which accounts for roughly half of the world’s consumption.
Click to enlarge
Copper’s rise underscores how better-than-feared economic data supports a range of markets near the end of the year. Stocks around the world and other commodities have also posted gains since the US and China reached a tariff truce in mid-October 2019.

The recent rally is a boon for producers and bullish investors who had watched copper prices languish for months despite falling inventories and lower-than-needed investment in new mines around the globe.

Mining Investment Guru Rick Rule Talks Copper

Click to enlargeRick Rule, President and CEO of Sprott US Holdings, is one of the most successful brokers of natural resource investments ever. A staunch contrarian, Rule looks to buy natural resource businesses for bargain prices after they’ve suffered large declines. Through the years, his disciplined investing style has made his clients billions of dollars in natural resources like gold, silver, copper, uranium, agricultural products, and even water.

According to Rick, the global supply of copper has become constrained. He explains the relative impact of an extended period of lower prices and low investment in a productive capacity.

However, he says prices are set at the intersection of supply and demand.

In an audio conversation with Stockhouse Editorial, Rick was asked where he thinks copper pricing and supply & demand are headed in 2020, if mining jurisdictions really matter, and about the significance of China as major market player:

(Click 'Investor Chat' image above to play podcast or download audio file)

Listen on Apple PodcastsListen on Google Podcasts

According to a Bloomberg report, a copper deficit is likely to emerge in 2020. Despite the fact that the current project supply chain will add new copper in the short term, the long-term trends paint a less pretty picture for the availability of the base metal.

With the obvious increasing demand for copper presenting itself to the global economy, and emerging economies in particular new discoveries, increased processing of recycled copper, and amped up production of existing mining projects is an imperative for the industry.

The challenge lies in the strong demand growth for copper. According to Bloomberg, demand for copper is growing at 3.7 percent per year. This year’s added supply of copper from new projects is expected to peak and will fall away dramatically as we move through 2020. Bloomberg still foresees the possibility of increased production from existing mines, but after 2020 they say there is no more flexibility.

Despite supply issues, metals & mining market analysts say the long-term outlook for copper looks positive. Supply remains relatively constrained because of disruptions in countries such as Indonesia and Chile, while many expect demand to rise as more consumers transition to EVs. Because investors remain wary of a short-term demand slowdown, anticipation of future shortages had done little to lift copper prices for much of the year…until recently.

For 2020, copper mining SWOT analysts believe that Cu is facing a finely balanced market, yet an ascending one for the longer term. But risks loom. As with all base and industrial metals markets, price fluctuations can be expected as a result of the unexpected – political turmoil, labour unrest, supply shortages, the Chinese coronavirus outbreak, and the on-again off-again trade war between the US and China.

With China’s high rate of copper utilization, it represents the greatest risk to overall demand this year. That being said, a January 2020 Reuters poll showed the price of copper is expected to climb this year, supported by a recovery in global economic growth and problems with supply.

In closing, the meteoric growth of electric vehicles, rising construction activities for power generation, and increasing consumer electronics industry is expected to boost copper demand over the coming years – something long-play metals & mining investors should pay keen attention to.

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