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

The Australian Mining Review - - NEWS -

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.

Image:BHP.

BHP Olympic Dam op­er­a­tion in South Aus­tralia.

Image:Newcrest.

KPMG Cop­per Com­mod­ity leader Mar­itza Araneda.

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