Commodities | Sep 09 2022
This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO
Forecasts for a renewed copper super cycle are temporarily on hold as global demand is impacted by slowing economies.
-Prior bullish forecasts for copper facing near-term headwinds
-Price forecasts for copper are currently trending down
-Analysts remain convinced the outlook longer-term remains buoyant
-Copper market expected to have significant deficit later this decade
By Nikhil Gangaram
Copper is the proverbial ‘canary in the coalmine’ when it comes to the overall health of the global economy.
Due to its broad range of applications, the red metal is widely considered as an economic bellwether. This is because copper is used in most sectors of the economy from factories and construction to homes and renewable energy.
As a result, Dr copper is viewed as a leading indicator of economic health.
Despite making a stampeding start to the year, copper bulls have been tamed in the past few months.
Vital signs for the red metal have been flashing red, with the copper price tumbling more than a third since March.
Short term pain
Thanks to a post-pandemic economic recovery turbocharged by stimulus and supply chain constraints, many thought that copper was on the precipice of a decade long super cycle.
The commodity enjoyed a dizzying run earlier this year, with the copper spot price soaring to a high of US$10,674/tonne in early March.
However, demand for the red metal has cooled sharply since then, with the copper spot price tumbling more than -36% to levels last seen in November of 2020.
There have been multiple macro-economic boogeymen that have prompted investors to dump their holdings in the commodity.
The most prominent cause for copper’s loss in popularity has to be the bleak economic outlook forecasted by central banks around the world.
Initially, the Russia-Ukraine conflict had many investors bullish with many anticipating the conflict would result in supply shortages. However, fears of a global recession have vanquished any sense of optimism as central banks raise interest rates to curb higher-for-longer inflation.
Adding to this have been weak economic data coming out of China which remains the world’s biggest buyer of commodities.
As other countries tighten their credit limits, China has followed suit with the country’s property market struggling. China’s zero tolerance covid-19 policies have also strangled any glimpse of demand with harsh lockdowns strangling the economic powerhouses of Beijing and Shanghai.
In mid-July, mining behemoth Rio Tinto ((RIO)) released a bleak production update in which the Anglo-Australian miner cited a “trough” in demand from China and declining consumer confidence.
In addition, a stronger US Dollar has also weighed down the copper price making it more expensive for holders of other currencies to buy.
In recent times, commodity analysts have been reducing their price forecasts for commodities, including for copper, as the weight of inflation and continuing central bank tightening is depressing economic growth prospects for the year ahead.
With Europe and the UK facing economic recession, while the US remains at risk too, it is thought that, for the time being, some caution remains warranted.
Commodity analysts at Citi, for example, have set a target for copper to hit US$6600/tonne over the next 6-12 months, which would imply further downside of circa -14%.
Long term gain
Although the copper price may be suffering through short term pangs, many investors have not given up on the idea of a decade long super cycle.
Copper itself is one of the oldest materials used by humanity with the metal being a superb conductor of electricity.
Despite new exploration projects, demand for the red metal is expected to outstrip demand medium-term as the developed world shifts to decarbonisation through the electrification of everything.
Copper should be a key beneficiary because of its use in electric vehicles, charging infrastructure, solar panels, wind turbines and batteries.
A recent study from S&P Global estimates global demand will double from the current consumption of 25mtpa to 50mtpa by 2035.
According to S&P’s vice chairman, the world has never produced so much copper in such a short timeframe. Severe shortfalls are a real possibility.
According to the International Copper Association, just wiring electric cars and buses will require 1.2m tonnes of copper alone by 2025.
As the developed world transitions into renewables, developing nations in Africa and Asia will also be relying on the red metal for continued urbanisation and development of essential transportation, infrastructure and communication technologies.
This adds another headache of where the additional supply will come from. The International Energy Agency estimates it takes 16 years until a project transitions from discovery to first production.
Despite being one of the most widely used metals on the planet, the ASX offers limited options to seek out companies that produce copper.
At the very top of the food-chain are behemoths like BHP Group ((BHP)) and Rio Tinto, who jointly own the world’s largest copper mine, Escondida, located in Chile.
Neither are pure-plays with both companies heavily relying on earnings from iron ore.
In similar fashion, the local gold producers’ community equally offers exposure, though most ASX-listed gold producers, starting with sector-leader Newcrest Mining ((NCM)), only mine copper as a secondary product.
Among the smaller cap, copper-oriented listings, one of the more notable local producers is Sandfire Resources ((SFR)).
Sandfire digs up approximately 60,000 tonnes of copper per year from its DeGrussa mine in Western Australia. In addition, the miner also owns projects in Spain and Botswana.
Fresh from knocking back a takeover bid from BHP, OZ Minerals ((OZL)) is another mid-tier miner that managed to produce 125,000 tonnes of copper from its mines in South Australia.
A smaller, lesser-known proposition is Owen Hegarty-backed 29Metals ((29M)) with ambition stretching into other critical metals.
29Metals surprised investors in August with an unexpected 2c maiden dividend.
AIC Mines ((A1M)), established through the merger of Intrepid Mines and AIC resources in 2019, owns and operates the high-grade Eloise copper mine in North Queensland.
For investors not afraid of a more tumultuous ride, there are also a myriad of junior explorers listed on the ASX that are looking to hitch a ride on the coattails of a copper super cycle.
Among the explorers with varying degrees of prospects and developments are Aeon Metals ((AML)), Austral Resources Australia ((ARL)), Cyprium Metals ((CYM)), Hillgrove Resources ((HGO)), Legend Mining ((LEG)), Musgrave Minerals ((MGV)), Metals X ((MLX)), New World Resources ((NWC)), Sunstone Metals ((STM)), and Titan Minerals ((TTM)).
The current outlook for all commodities including copper has most investors polarised.
In the near-term investors can expect continued uncertainty and weakness in the copper price as micro and macro-economic factors squeeze buyers.
However, as the decarbonisation narrative takes shape over the coming decades, and the world moves towards net zero, the general forecast is demand for the versatile metal will only grow.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
For more info SHARE ANALYSIS: 29M - 29METALS LIMITED
For more info SHARE ANALYSIS: A1M - AIC MINES LIMITED
For more info SHARE ANALYSIS: AML - AEON METALS LIMITED
For more info SHARE ANALYSIS: ARL - ARDEA RESOURCES LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: CYM - CYPRIUM METALS LIMITED
For more info SHARE ANALYSIS: HGO - HILLGROVE RESOURCES LIMITED
For more info SHARE ANALYSIS: LEG - LEGEND MINING LIMITED
For more info SHARE ANALYSIS: MGV - MUSGRAVE MINERALS LIMITED
For more info SHARE ANALYSIS: MLX - METALS X LIMITED
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: NWC - NEW WORLD RESOURCES LIMITED
For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: SFR - SANDFIRE RESOURCES LIMITED
For more info SHARE ANALYSIS: STM - SUNSTONE METALS LIMITED
For more info SHARE ANALYSIS: TTM - TITAN MINERALS LIMITED