November 11, 2022
Updated: December 2022 (Updated for prices and data only)
By: Bentley Atteberry, Myst Metals Team
Copper: Brief Price Review
The Story through Price
October 2022 marked the seventh straight month of losses for Copper prices. At the end of October, Copper was down around 22% since the beginning of the year and over 30% from last October’s peak above $11,000/tonne on Cash prices (Benchmark 3-month forwards only hit a high just below $10,500 during last October’s cash squeeze and peaked at $10,845 in March 2022).
No Squeeze November?
Our team flagged comments made around mid-day in Asia on Friday November 4th from the Chief Scientists at China’s Center for Disease Control and Prevention about changing their approach to covid restrictions. The markets caught this too and by the time North America came to their desks, it was apparent this was not going to be some quick, algo-driven pop in the markets. The financial side of the market (traders, investment firms, etc) used the news as a reason to pile in.
Copper ended November 4th up 7.3%, the largest single day gain since February 2009 and on the highest volume since peak financial covid liquidation in March 2020.
So, was someone caught offsides? As intriguing as those sorts of stories may be, it does not appear to be the case this go around. Speculators were estimated to be slightly short Copper to start November. Financial positioning has been low overall in commodities since last spring so there is plenty of room for growth in length which appears to have accelerated further on the back of the US CPI print on Thursday November 10th. As of writing, LME Copper is up a whopping 14% in November (Updated close November 11).
Getting Physical
What about the physical markets? In the end of the day, the physical markets are what really matters for any decent sized price move to stick in the long run. Again, the price action in November does not reflect any sort of short squeeze like seen in October 2021. In fact, the action in the physical space took place post National Day holiday in early to mid October. Time spreads and premiums, typically indicators of merchant activity in the warrant and physical markets, have been either mute or soft. Benchmark LME Cash to 3-month time spreads have come in from around $75 backwardation at the end of October to last traded at $14 on November 11th.
The story is even more extreme in China where the import arbitrage window closed, Yangshan Premiums (in warehouse and bills of lading for Nov) fell around 13%, and spot premiums to front month futures went from over 800 yuan/tonne backwardation in late October to -85 元/mt contango on November 11th.
Much is the same in the global premium markets as spot activity has been quiet post LME week. The significant recent news has come from 2023 premiums into China and Europe from South American producers. Codelco last week announced a premium offer to Chinese participants that is 33% higher than 2022 to $140/tonne. Reactions from merchants and downstream to these offers are much of the same sort of theme we have seen across the metals space heading into 2023.
Consumers and merchants alike are hesitant locking in much of any long-term prices/contracts due to uncertainties and financing costs. While this means demand may wane in the near term, it also increases the risk of merchants/downstream being underbought or undersupplied when demand does pick up (see Outlook section for more details).
Copper: Supply Story
The Growth in Mining is Back… Sort of
Copper mine production growth has struggled the past six years or to keep up with demand from smelters. The limelight has moved back to metal producers in the past year as the energy transition accelerates and the realization that much more metal is needed in the future. Sounds like a good thing, but as we hit on in the Outlook section, the Capex commitments are underwhelming and projects take several years, sometimes decades before they start producing. With that said, some significant projects successfully ramped up this past year including Komoa Kakula in The DRC resulting in a 28% increase in production in the country thus far in 2022.
On the flip side, Chilean production has struggled the last several years. Water shortages and constantly decreasing ore grades have hampered production in the largest Copper mining country. Outlook for 2023 in Chile looks potentially worse than 2022 despite production already being down nearly 7% thus far in 2022. The staggering fact is that Chilean output in 2023 is projected to be just marginally higher than 2003.
Peru has seen growth in 2022 despite constant blockades of mining roads by protestors. Las Bambas mine (capacity to produce 2% of global mine production) has spent just as much time operating cleanly as it has had with disruptions since it first started production in 2016.
Overall, global mine production has increased by about 2.5% through September 2022.
Supply is More than Mining Rock
Copper refined from secondary sources (scrap) made up nearly 17% of total refined copper production in 2021. While 2020 saw a dip in secondary production due to an incidental ban on scrap imports in China, that was later reversed, and secondary production slightly improved in 2021 (+0.6%). 2022 has seen a further logistical issues cause a shortage of supply in the scrap markets with secondary production falling 1.6% during the Jan-Sep period in 2022.
The lone bright spot for copper refiners has been the continued growth in Anode shipments out of Africa, specifically The Democratic Republic of the Congo due in large part to the successful ramp up of Ivanhoe and Zijin's Komoa-Kakula mine.
This scrap shortage has really appeared in the operating rates of copper cathode rod refined with secondary copper and the price discount (premium) of that rod compared to primary copper rod. In some instances, they have gone at a premium. This is more of a pricing technicality but still shows the tightness in the scrap markets.
Along similar lines, the supply logistics out of port of Durban (South Africa) has resulted in delays and inconsistencies in copper anode (blister) shipments to smelters in China. This impact is clearest through the fall in Refining Charge (RC) rates of 98-99% blister while Treatment Charge (TC) rates tied to concentrates have steadily risen through the year (note: TC and RC rates typically fall when upstream supply is tight and the pricing power is held by the upstream while they rise when supply is plentiful and pricing power is held by the smelters/refiners).
Overall Supply Story
Overall, global refined copper supply grew by 1.4% in the January to November period over 2022. A mix of brownfield and greenfield mine projects continue to come online enabling a steady supply growth to continue into 2023 (read more in our outlook section).
Copper Demand
Resilience Despite the Gloom
Demand for refined copper globally in 2022 has remained above long-term trend growth (~2.4%) with apparent consumption up about 4.08% YoY in the Jan-Sep period.
Ex North America Leading Growth
Nominally, China has had the greatest impact on demand growth through 2022 at 6.8% growth in apparent demand through November and Social Inventory down 7.4% YoY in early November (China’s share of refined copper consumption is around 55% of global). This all occurring despite a sharp decline in the real estate development sector (see Outlook for more details).
North America (United States, Canada, and Mexico) have all witnessed contraction in refined copper usage thus far in 2022 while East Asia continues to grow.
Inventory Drain
Global visible inventories continued to fall throughout 2022. Despite lower inventory turnover volumes on exchanges, overall stocks being held in warehouses on and off exchanges has hit record lows in China (See graphic in Price Review section above). Lower available stocks and sharply higher prices are key contributors to the fall in warranting activity. The low amount of visible inventory highlights a key future upside risk.
Inventory & Global Demand Continued…
North America (United States, Canada, and Mexico) all witnessed contraction in refined copper usage thus far in 2022 while East Asia continues to grow.
Of the top ten consumers of copper, India has experienced the largest growth at a staggering 30.8% YoY through November.
Globally, the rise in consumption may be a bit of a surprise as sentiment and price action in recent months point to a different story. Global visible inventories continue to fall despite being at historically low levels.
Global supply and demand deficit indicates a year-to-date deficit of around 830,000 tonnes compared with a deficit around 280,000 tonnes in all of 2021.
Where is it Coming From?
The obvious thought is that demand has slowed due to the property sector woes in China and the slowing housing construction in the US and Europe. Those slowdowns have been overwhelmed by the continued increase in demand from the PV (Solar), electric vehicle, battery, and transmission grid sectors. The ability of these sectors to keep overall copper demand growth above trend despite a steep drop in housing construction activity globally shows the potential for further growth moving forward (See more in our Outlook section).
Copper: Medium/Long-Term Outlook
Near Term Disruptions Not Expected to Hold Back Short-Term Supply Growth
Just in the past week, Codelco announced a 135-day maintenance shutdown of Chuquicamata Smelter in Chile (319,280 tonnes of production in 2021). This was previously forecast to be just 90 days but a longer period will be required for the much-needed overhaul. While we do not believe this will cause many disruptions, it is note-worthy since the ore feed used at the smelter contains too high of an arsenic level to meet Chinese import regulations.
Supply-side Response to Higher Prices
As we mentioned in the supply section, capex from the upstream has been ticking up slightly. With that said, it remains below the levels of the last demand side boom about a decade ago and expenditures remain focused on brownfield expansion projects and maintaining output levels on current projects.
We do anticipate a healthy bump in mine production growth over the next couple of years; however, we see continued risk in supply out of South America, particularly Chile and Peru which have been hit with water shortages, lower ore grades, regulatory pushback, road blockades, labour strikes, and other similar issues.
In the longer run, significantly more commitments from producers are needed to keep healthy supply side growth. We have already seen producers hesitant to commit to more projects and have even seen the likes of Freeport announce a pause in capex decisions since price has tumbled from the highs. Long-term projections remain murky for these reasons.
Smelter and refiner capacity is of minimal concern moving forward and is typically not a constraint on refined output. Smelters and refiners can be commissioned in much shorter times than mines (6-18 months vs 5-20 years) and current capacity is plentiful. Typically, inputs and margins (costs, prices, and bi-product prices) have the largest impact on output. While electricity prices all over the world have increased substantially, it is not expected to have a large impact on overall refined output. It is expected to have an impact on regional premiums as refiners charge extra to cover an increase in energy costs.
We have already seen this in pricing for 2023 as Aurubis recently announced an additional floating premium tied to electricity prices for their products.
Mine capacity is expected to around 2.5% per year through 2026 according to ICSG, however, we are expecting slightly higher growth in supply over the next 2 years due to a slight increase in the refining capacity utilization rate and continued secondary supply increases. Therefore, we anticipate a healthy increase from the supply side between 3.0-4.5% annually over the next two years with risks of missing that expectation to the downside.
Russian Risk
Russia remains one of the largest producers of refined copper globally (around 4% of global refined production) and has traditionally been a supplier to European semis producers and other manufacturers. We pointed this in our insights piece on Russia & Ukraine’s commodity importance back in February (can be found here). Through August of this year, imports from Russia into Germany for refined copper have picked up 46.5% over the same period in 2021 but have fallen by around 4% into China. On November 11, the LME announced they would not be banning Russian metal as many downstream participants continue to use it. We cannot ignore the risk of Russian copper being sanctioned by Europe or the United States which would essentially ban it; however, we keep in our baseline a status quo.
2022’s Demand Resilience Shows the Risks
As we previously pointed out, Demand for refined copper in 2022 continued to grow at above trend rates despite a monumental slowdown in the property construction sector globally. This shows how much of an impact the growth in demand from electric vehicle, battery energy storage systems (BESS), photovoltaic solar panels (PVs), wind turbines, and other grid infrastructure is having on copper.
Over the next three to six months, we are seeing an increased likelihood of demand slowdown in Europe and North America; however, our baseline scenario is for continued above-trend demand growth for copper over the medium and long term. This is not only due to increasing demand from the energy transition, but also from the increase in infrastructure projects globally and bottoming out demand from real estate sectors. China will continue their grid infrastructure build out, The United States infrastructure bill projects begin to ramp up, Indonesia continues construction of their new capital city, Nusantara, India industrialization infrastructure, and of course the build out of global infrastructure related to the energy transition.
Additionally, recent measures put in place by the Chinese government to rescue developers and restart/finish real estate projects could provide an extra boost. Copper is typically a very late-stage material in real estate development (wiring), that means it is likely more copper wire will need to be purchase to finish those developments. Our team believes though that the most significant impact of the government support measures will be driven by the overall impact from the release of working capital.
As a base case scenario, we anticipate a slight rebound in Chinese building construction over the medium term. This has already been apparent in the engineering and construction equipment spending in the first nine months of 2022. While we do not rule out further declines in the housing sector, we have already seen the investments rolling into new building construction for new manufacturing facilities. This is the case not only in China, but also globally.
China New Energy Vehicle Sales (Monthly)
China Electric Vehicle Demand
Despite covid lockdowns and a material economic slowdown, the output and sales of NEVs in China over the past two years has grown exponentially (up 99% YoY in September). Government stimulus incentives for NEVs have been rolled multiple times to assist in stimulating the consumers. While a chunk of these are set to expire at the end of 2022 and 2023, the domestic market has matured enough to include not only high end EVs but also mid and entry level priced vehicles (Hongguan Mini & Cherry QQ Ice Cream still cost under $6,000 in China). This will aid in continued growth in the EV market in China even though precursor refiners are beginning to report a slowdown in downstream demand for Q1 2023.
Ex China Growth still Picking Up
China currently accounts for over 60% of NEV sales globally (64% in September, SMM). Europe makes up the second most at around 23% share with the United States lagging at just 8%. In Europe, regulations, more EV infrastructure, and greater consumer appetite gave the region a jump start over North America. Production constraints and a tepid consumer may hinder output and sales during the winter months in Europe. Once spring arrives, we anticipate production and sales to ramp up and exceed prior levels due to the positive impact of new supply chain facilities (ie: Infineon’s chip facility in Austria). In the United States, EV sales growth is expected to persist on the current trajectory. While consumer adoption in The United States has been more of a struggle, the corporate commitment to fleets of electric vehicles has been strong.
Commercial EVs typically also require more materials overall.
Electricity & Grid Infrastructure
Electricity can travel through copper with less resistance than most other elements sans Silver. This is why copper is such a vital component in generators, motors, transformers, electronics, and energy production systems. Photovoltaic (PV) solar cells use their fair share of silver and tin but also require substantial amounts of copper. In fact, it is estimated that around 5.5 tonnes of copper is used per megawatt (MW) of PV systems (Copper Development Association). PV installation growth is expected to grow annually at rates over 20% throughout most of the world.
While we are not anticipating quite as aggressive of growth from wind generation, it is still expected to see growth in the mid teens.
Onshore wind farms typically utilize around 3.5 tonnes of copper per MW and offshore wind farms can take up to 9.5 tonnes per MW due to the extra cabling required (Copper Development Association).
In general, energy generation, energy storage systems, energy transmission and overall grid infrastructure require mass amounts of copper. We project these areas to continue to grow at rates that are well above historic trends as renewable energy policies and spending is put to work globally.
Overall Outlook
The near-term demand outlook may look gloomy at first glance as developed economies are expected to slow down or contract over the winter months. Despite that, we still believe that demand for materials linked to the energy transition to remain in well supported in the medium term.
Our baseline forecast incorporates a bit of demand weakness at the end of 2022 and early 2023, resulting in demand growing in the 2.5-3.5% range for 2022 as a whole and possibly 3-5% in 2023. This would result in a minor deficit for 2022 and hovering right around a balanced market in 2023. It is worth noting that we believe a material amount of stockpiling has occurred from merchants and the new energy downstream in China and the rest of the world. There have been a significant amount of solar and battery factories coming online in 2022 and early 2023. Typically, a manufacturer will stockpile inputs before beginning production. For this reason, the demand figures for 2022 may be a bit higher and 2023 a bit lower as manufacturers bought input inventory in 2022 for use throughout 2023.
We believe the biggest risk to this forecast being a prolonged economic slowdown past next spring in North America and Europe. That scenario would push back our demand forecast but not necessarily wipe out demand as the policies are already in place and the money already earmarked for these projects.
Remember, this is not just an economy or region emerging and driving demand growth. This is a global transition across developed and emerging economies alike.
DATA & RESEARCH SOURCES: Myst Capital | WBMS | Shanghai Metals Market | Refinitiv | London Metal Exchange | International Copper Study Group
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