Commodity Focus: Copper
Like many of its base metal peers, copper has had a challenging couple of months with its price plummeting more than 15 per cent in the wake of trade tensions between the US and China. However strong mid to long term demand for the red metal – particularl
Q. Describe how copper has been faring and reasons for its volatility in recent months?
Copper prices are sensitive to shifts in the global economic outlook and in times of uncertainty, prices are volatile.
This has certainly been the case over recent months, with the copper price being dragged down by geo-political uncertainty.
The threat of additional US tariffs on Chinese goods has fuelled volatility on Asian stock markets, which has in turn provided an uncertain price outlook for copper.
Copper prices began the year strongly, carrying strong momentum from 2017, which saw prices increase by 30 per cent when compared to 2016.
Fears of supply disruptions due to labour contract negotiations at mines in Chile coupled with a Chinese ban on scrap imports, due to pollution concerns, helped copper prices remain high during the first half of 2018.
Prices reached $US3.30/lb on renewed optimism about growth in China, the threat of supply disruptions and a weaker US dollar.
However, the second half of 2018 saw prices fall sharply, with significant volatility experienced during this period.
The red metal currently sits at $US2.80/lb, representing a year to date drop of about 15 per cent.
The volatility has been fuelled by concerns of a trade war between the US and China combined with a stronger US dollar.
Copper, which is a US dollar denominated commodity has become more expensive, which has a direct impact on demand.
This has been the result of US Fed monetary tightening which has strengthened the US dollar.
Q. What’s your outlook for copper into 2019?
Current indications are that the US will go ahead with its threat to increase tariffs of Chinese goods in 2019.
This will hurt an already slowing manufacturing sector in the country. China is responsible for nearly half the world’s copper consumption and as such, the red metal’s prospects hinge largely on steady demand from China.
Notwithstanding a slowing manufacturing sector, reductions in inventories levels at LME warehouses would still point towards robust copper demand in China and a further surge in imports.
While global uncertainty will continue, I still believe that supply and demand fundamentals for the industry remain solid.
I believe the market will end 2018 in a deficit (undersupply) position, meaning that prices should not drop below current price levels of $US2.80/lb.
My expectation is that copper prices should average $US3.10/lb in 2019 as the deficit widens.
Q. South Australia has traditionally been the copper State, however has seen slowed growth in exploration and discoveries. Are you confident the State will discover another Olympic Dam-style deposit in the near future?
History would suggest that when copper prices are high and long term market fundamentals are strong, miners will be more aggressive on exploration opportunities.
Over the last 12 months we have seen mining companies pull back on exploration expenditure as the focus has been on expansions or production efficiencies at existing facilities.
This has certainly been the case in South Australia, as evidenced by Olympic Dam and Carrapateena.
Having said that, the South Australian government has put out its intention to triple South Australian copper production by 2030 and will do so by accelerating exploration, discoveries and developing innovative infrastructure, services and research. All of which are positive steps to assist in incentivising future exploration.
Q. The electric vehicle market is set to be the big driver for copper’s growth in the next decade, what other markets are emerging for copper?
In my view the three key markets or growth opportunities in the next decade are: electric vehicle consumption, renewables/power grid investment and infrastructure.
All of which will have China at its core.
In terms of the EV market, copper is a key component of the lithium-ion batteries used in the electric vehicles, as well as power inverters and in the charging infrastructure needed to keep them running.
In fact, EV are estimated to use as much as 30 per cent more copper.
China is the leader in the supply of and demand for EV, followed by the US, which is also expected to be a significant consumer.
The $4 trillion One Belt One Road initiative is seeking to open channels between China and its neighbours, mostly through infrastructure investments that will require large quantities of copper.
This drove significant optimism in long term fundamentals.
Thirdly, a significant portion of the copper that is consumed by China is used in its renewables/power sector.
As China and other emerging countries such as India and continue to move to renewables energy systems, demand for copper will continue to surge. Copper usage averages up to five times more in renewable energy systems than in traditional power generation.
BHP Olympic Dam operation in South Australia.
KPMG Copper Commodity leader Maritza Araneda.