The Global Copper Supply Landscape: Is a Bull Market on the Horizon?

Moomoo News AU wrote a column · Apr 3 17:57

Since the fourth quarter of 2023, the global copper mining industry has experienced multiple supply disruptions, with recent news of planned production cuts by Chinese smelters intensifying market unease. Supported by expectations of a tight supply, $Copper Futures(MAR5) (HGmain.US)$ prices have been fluctuating with an upward trend since the end of October last year, and have recently seen an accelerated increase. Since March, global copper prices have continued to climb, with the international copper price (LME Copper) breaching the $9,000 per ton. As of the latest data, the price remains above $8,800 per ton.

The Global Copper Supply Landscape: Is a Bull Market on the Horizon?

Overview of the Copper Mining Supply Landscape

The copper industry is primarily segmented into upstream copper mining, midstream smelting, and downstream products such as profiles and copper foil. Due to challenges like financing, environmental regulations, and the scarcity of resources, upstream copper mining lacks flexibility.

Currently, global copper mine production is concentrated in Chile, the Democratic Republic of the Congo, and Peru. According to data released by the USGS, these three countries account for production shares of 23%, 11%, and 12% in 2023, respectively. Following them are China and the United States, which contribute 8% and 5% of the global output, respectively.

Refined Copper Supply Shortage in 2023

According to the International Copper Study Group (ICSG), Copper mine capacity in 2023 reached 28.25 million tons, up by 4.5% from the previous year, while global copper mine production experienced amodest increase of 0.5% to 22.06 million tons. The limited rise in production resulted in a capacity utilization rate of 77.9%, a historic low for the industry. In 2023, the global refined copper production reached 26.93 million tons, with consumption at 27.01 million tons, creating a supply shortfall of 85,000 tons.

The global copper mine production is further corroborated by the production data from the world's top ten leading mining companies in 2023. Notably, Codelco saw the largest drop in production, down by a significant 15%, followed by $First Quantum Minerals Ltd (FM.CA)$ with a 9% decrease. Meanwhile, $GLENCORE PLC (GLNCY.US)$ and KGHM's production fell by 5% and 3%, respectively. Collectively, the top ten leading mining companies posted a meager 1% increase in total production for the year. The reduction in output from these four major mining enterprises has been a primary factor in dragging down global copper mine production growth in 2023.

Insufficient CapEx Constrains Future Supply Flexibility

When looking at the capital expenditure (CapEx) of copper companies, there's a general reluctance to increase spending due to unfriendly factors such as high interest rates and environmental and safety regulations. Based on statistics from Everbright Securities, since reaching a peak in 2013, the CapEx of major global copper companies has remained low for several years. Even during the 2019-2022 copper price rally, there was no significant increase in the CapEx of major copper mines.

In 2021, the average price of copper on the LME hit a historical high of $9,294 per ton, which was a 54% increase from 2019. However, during the same period, the CapEx of major copper companies only grew by 10.6%. Even with copper prices remaining high in 2022, the major copper companies only increased their spending by 5%.

The construction cycle for copper mines is lengthy, with large copper mines typically requiring more than seven years to develop. This means that the release of copper mine capacity is significantly lagging behind their capital expenditure. After a substantial decline in copper mine CapEx post-2013, the capital expenditure in recent years has been mostly for maintenance, with a severe lack of investment in new capacity. This indicates that it is highly probable that there will be limited supply elasticity in the medium term due to these constraints.

Is Supply Overestimated?

According to the latest report published by the ICSG in February, global copper mine productiongrew by 0.5% in 2023, a significant downward revision from the 2.4% growth forecast made in October of the previous year. Meanwhile, the demand growth rate previously forecasted by the ICSG in October was 2.02%, but the latest data has revised it upward to 4.6%. This revision indicates that the gap between supply and demand growth rates has widened from a marginal 0.38% to a deficit of -4.1% in 2023.

Looking ahead to 2024, production guidance from the top ten copper mining companies suggests a mixed outlook. First Quantum, KGHM, and Anglo American have projected significant reductions in production compared to their output in 2023, with their midpoint guidance indicating decreases of 44%, 20%, and 8%, respectively. Despite small increases in production guidance from $BHP Group Ltd (BHP.US)$, $ZIJIN MINING (02899.HK)$, and Antofagasta, the overall output from the top ten copper mining companies is expected to decline by approximately 2.93% in 2024.

Goldman Sachs predicts that copper prices will maintain an upward trajectory until next year, marking an expected rise to $10,000 per ton by the end of 2021 and $12,000 per ton by the end of Q1 2025, due to intensifying supply constraints.

Morgan Stanley stated in a note that "Elevated mine supply disruptions point to a deficit of 700,000 tonnes, and should start to feed through to refined production too," and predicted that the price of copper will reach $10,200 per tonne by the third quarter.

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