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30 November 2020
Times have been good the last eight months or so if you’re a copper producer. Back in late March, during the Corona Crash, copper got down to nearly US$2 a pound on Comex, one of the main futures markets for copper. Since then, the re-rating has been steady and as at late November copper was back up at US$3.40 a pound, which is around a seven-year high.
Every year the world consumes around 25 million tonnes of refined copper, of which mines supply about 21 million tonnes and recycling the remainder. Copper is a staple of the world economy. Indeed, it’s one of the three most used metals in the world alongside iron ore and aluminium. The only metal that conducts electricity better than copper is silver, so something like 75% of the world’s copper output goes into electrical equipment such as wiring and motors. Copper also has multiple uses in construction, such as in roofing and plumbing, and in industrial machinery, such as heat exchangers.
Inventories are gradually declining
The copper re-rating of 2020 has largely been due to expectations that global economic growth will resume in 2021 after a difficult 2020. Helping that view has been a progressive drawdown of copper inventories for most of the year, interrupted by only two slight increases, between January and March and again in September and October. Demand from China has been increasingly strong as 2020 progresses, not only because that country has been leading the global economic recovery, but because Chinese demand is particularly strong. China imports more copper ore than any other country in the world, accounting for around two fifths of global copper ore imports.
Most analysts expect that copper demand will grow strongly in the years ahead thanks to the rise of the Electric Vehicle. A traditional gasoline-powered car might use 20 kilograms of copper, mainly as wiring. A hybrid vehicle such as the Toyota Prius needs about 40 kilograms, while a fully electric car, such as the Tesla Model 3, doubles that to roughly 80 kilograms.
When you add up traditional demand and excess demand related to rapidly emerging countries investing heavily in infrastructure, copper demand is expected to grow roughly 3% per annum in the years ahead. That’s good news for Chile, which accounts for over one third of the world’s copper output, as well as for Australia, which ranks behind by China, Peru and the United States on the league table of major producers. On the supply side, there’s been a steady decline in grades at established mines while others have seen a progressive run-down of reserves. That suggests the potential for copper to be in structural deficit by the middle of the decade if no major discoveries are made and rapidly brought into production.
Our favourite ASX copper hopefuls
At Stocks Down Under we have written a lot about copper in recent months. The two most notable copper stocks on ASX are Sandfire Resources (ASX: SFR) and Oz Minerals (ASX: OZL) and we wrote about those companies on 27 July and 19 October respectively. Oz Minerals has been a star performer thanks to the Carrapateena copper-gold mine in South Australia and the company is also expecting good things from the West Musgrave nickel-copper project. Sandfire is getting near the end of mine life for its DeGrussa copper mine, but it’s got a few interesting copper projects on the boil, most notably Tshukudu in Botswana and Black Butte in Montana.
On 26 November we profiled Stavely Minerals (SX: SVY), which may have a new copper mine in western Victoria near the town of Hamilton if the drill results that company has been getting keep up. One of the more speculative opportunities in copper on ASX is Bougainville Copper (ASX: BOC), whose Panguna mine, as we noted on 31 July 2020, represents one of the largest undeveloped copper resources in the world and now has a shot at a restart given the potential for the PNG province of Bougainville to become independent sooner rather than later.
Old equity market operators sometimes joke that ‘every market top is lined with copper’, indicating that high copper prices are a sign of speculative excess. So, our bullish theme on copper needs to be accompanied by constant vigilance. However, the structural deficit theme could prove interest as a long-term play. Remember, this metal’s peak back in 2011 was above US$4.60 a pound, which is quite some way off today’s prices.
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