According to the company’s website news release on February 21, 2023, Copper prices ranged from $7,000/t to $8,537/t ($3.18/lb to $3.87/lb) over the first half of the 2023 financial year, averaging $7,871/t ($3.57/lb).14 The average was around –19% lower than in the prior half and –17% versus the equivalent half of financial year 2022.
Zooming in on the price path in the first half of financial 2023, the period opened with copper caught up in a major downdraft dating back to the middle of the June quarter. As markets grappled with the joint implications of China’s strict adherence to zero–COVID, ongoing weakness in Chinese housing, soaring inflation outside China, a burgeoning energy crisis in Europe and the US Fed leading the global rate hiking stampede, there were two obvious decisions to take: (1) buy the US dollar and (2) seek refuge away from growth–sensitive assets like exchange traded industrial commodities.
The trough for the May–July copper price move was $7000/t ($3.18/lb), which printed on the ides of July. That was –35% below the record high of $10,730/t ($4.87/lb) set in early March–2022, prior the world being gripped by recession fears. From mid–July, a narrow range trade centred on $7,700/t formed through to October, with a few tests towards $7300/t and an occasional unconvincing pop above $8000/t. The range held firm until November, when copper broke out to the upside. The shift came as the US dollar started edging off its highs as a series of positive inflation surprises came through, and as China executed its dual U–turns on zero–COVID and property developers. A new range of $8000/t to $8500 was established through to year–end, with the high for the period reached in mid–December, at $8537/t ($3.87/t). Prices took another step higher in the new calendar year, with copper roaring past the $9000/t and $4/lb psychological thresholds amidst the general updraft that lifted all growth–sensitive assets.
Both industry specific fundamental factors and swings in broader macro sentiment will remain influential factors in price formation. Indeed, the contest between the 3–Rs of reality / re–opening / relief outlined in the preamble to this blog is arguably most applicable to copper.
Turning to Chinese demand first of all, the end–use picture was patchy. Construction, machinery, air–conditioners and refrigerators all saw demand fall from calendar 2021 levels, while electronics was essentially flat. This was offset by pronounced strength in power infrastructure and transport, both of which benefitted directly from China’s +70% uplift in energy transition investment (accordingly to the Bloomberg NEF definition) across calendar 2022. This mixed performance still allowed copper to out–perform steel by a wide margin for a second consecutive year, (+1.5% semis, +0.5% end–use, versus around –2% for steel. In calendar 2021, copper semis expanded 5.1% while steel declined –2.8%).
Construction demand has been weak, as detailed at length in the China economy chapter. More specifically for copper, housing completions vastly under–performed relative to expectations at the outset of calendar 2022. The consensus view on housing at that time – which we agreed with – was that completions would be quite strong over the year but starts were likely to decline. A –15% decline in completions was not on any credible radar, but that is what occurred as projects ground to a halt for want of working capital.
The positive stories for Chinese copper use in calendar 2022 were power infrastructure and transport. The imprint of decarbonisation in these sectors is clear, with wind and solar accounting for 63% of installed power capacity in the year (solar +60% YoY), while NEV sales grew 96%.
Within the power infrastructure segment, grid spending (typically four–fifths of the segment) increased +2% YoY and power generation (one–fifth) increased +23% YoY. Wind under–performed solar this year as subsidies for the former expired, although exports still grew strongly. Expectations for calendar 2023 though are high based on a strong pipeline of projects (which are split roughly 80:20 between onshore and offshore – the latter being hugely copper intensive). In the more prosaic area of traditional grid outlays, State Grid has set their nominal budget for calendar 2023 at 520 billion yuan, +4% YoY.
In the ROW, demand contracted mildly in the second half of calendar 2022, following modest growth in the first. Overall, ROW crept 0.3% higher YoY, with contracting demand in the major OECD regions offset by a steep rebound in India. Four of the five regions into which we categorise the ex–China copper world have now reclaimed pre–pandemic demand levels – with North–east Asia being the exception. For calendar 2023, we anticipate further declines in North America and Europe, a flat outcome for North–east Asia and high single digit growth from India, which rolls up to a slight decline for ROW overall.
On the supply side of the industry, copper concentrate supply has gone from “extremely tight” 6 quarters ago to “regularly tight” at the outset of calendar 2022 to “are we balanced or in surplus?” in the second half. The TCRC benchmark for 2023 settled at $88/dmt & US 8¢/lb in November 2022, well up on the $65/dmt & US 6¢/lb, agreed in December 2021 for 2022. We note that spot TCRCs have traded below the 88/8 benchmark in calendar 2023 to date, but they remain comfortably above the prior year’s settlement. Even so, smelter profitability has eased, with acid by–product revenues coming off sharply from their peak in the June quarter of 2022.
As of Jan–2023 (i.e. with the benefit of some but not all December quarter operational reviews), Wood Mackenzie had so far identified disruptions equivalent to around 5% of initial production expectations in calendar 2022. At the same point a year ago, disruptions were running at 5.1%. Note that 5% is the long run average for this metric: and that is our default assumption at the outset of any year. However, calendar 2023 is not going to be a normal year in terms of interpreting disruption factors. That is because several major copper producers lowered their published production expectations for calendar 2023 during 2022 – and on our estimates these downward revisions are worth ~3.1 percentage points of pre–disruption primary production (~3.4% post disruption) versus what was guided for 2023 at the outset of 2022. Therefore, to hit 5% in calendar 2023 versus year–opening guidance would be the operational equivalent of ~8–8½% if guidance had not been pre-emptively lowered.
Turning to the outlook, a long–awaited cluster of projects (including in Peru, Chile, central Africa, and Mongolia) have either recently come on–line or are expected to do so within the 2023–2024 window. While there have been a range of problems encountered delivering and ramping–up projects through the pandemic, when the dust settles, we expect mine supply will have lifted by around +12% from calendar 2021 levels by the end of calendar 2024, roughly doubling the +7% increase in refined demand expected over the same period. Rising primary supply is also expected to coincide with an increase in the availability of copper scrap. The scrap uptrend is supported by the increasing size of the end–of–life pool in China, elevated prices, and fewer physical constraints from social distancing. Global secondary supply (3.5 Mt in a 24.8 Mt refined industry in calendar 2022) is expected to be +9% higher in calendar 2024 than in 2021.15
The industry must digest the entry of this supply over the next two years, at a time when demand in the developed world is expected to be at a low ebb: which puts a major onus on China. Instinctively, at a high level this feels like the supply–demand balance is more likely to be in surplus than not under these conditions.
Bottom–up, we reach the same conclusion.
Once this phase of the decade is transited, a durable inducement pricing regime is expected to emerge in the final third of the 2020s. Holistically speaking, a modest build–up of inventories in this decade’s middle third would provide a healthy buffer in advance of the pronounced deficits we envisage in the copper industry’s medium–term future. A “take–off” of demand from copper–intensive easier–to–abate sectors (renewable power generation, the electrification of light duty transport, and the infrastructure that supports them both) is expected to be a key feature of global industry dynamics as the final third of the 2020s arrives: if not earlier. As discussed above, rapid growth in renewable power generation and EVs (electric vehicles) in China are already making a material contribution to growth, at the margin. As the world’s other industrial giants seek to make inroads into China’s significant capacity lead across multiple decarbonisation hardware segments, copper is well positioned to thrive on that competition.
Looking even further out, long–term demand from traditional end–uses is expected to be solid, while broad exposure to the electrification mega–trend offers attractive upside. Grade decline, resource depletion, water constraints, the increased depth and complexity of known development options and a scarcity of high–quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to ultimately balance the market.
On this latter point, it is notable that while there has been some activity in the project space, the industry–wide response has been timid when you consider both the elevated prices we have observed and copper’s future facing halo effect. That underscores the idea that the collective option set of the industry is constrained. It may also reflect policy and political uncertainty, with both Chile and Peru (together about two–fifths of world mine supply prior to the pandemic and one–third of reserves16) presenting a fluid regulatory and civil society picture to would–be explorers, project developers and asset owners. Indeed, the joint share of global mine supply contributed by the Andean powers has fallen –5 percentage points to ~35% since the pandemic began.
In terms of hard numbers, our internal estimates show that in a plausible upside case for demand, the cumulative industry wide capex bill out to 2030 (which will be here before we know it) could reach one–quarter of a trillion dollars.
Yet according to data assembled by S&P Global Market Intelligence, capex for copper production at miners is expected to decline in real terms between calendar 2022 and calendar 2024, (noting that inflation leads to some uplift in nominal terms), which would put real capex at just 54% of the super–cycle peak. Digging a little deeper, if we distinguish between sustaining and development capital, spending was apportioned 70:30 in calendar 2022 (sustaining being the larger figure). The average share going back to 1991 is a more balanced 59:41. In calendar 2024? 77:23. The projection for 2026? 91:9. That final figure should not be taken as fixed, as the industry can do something about the development pipeline in that year if swift action were to be taken, but time is running extremely short if a capex air–pocket is to be avoided at precisely the moment when the industry ought to be ramping up its development efforts.
It is quite apparent that there remains a very substantial disconnect between what needs to be done at the macro level to support both rising traditional demand and the exponential lift in metal needs implied by the energy transition, and what is occurring at a micro level.
Further to the macro–micro disjuncture, we have frequently highlighted the grade decline (around –2 Mtpa by 2030) and resource depletion headwinds the sector is facing this decade. Left unchecked, resource depletion could potentially remove an additional –1½ to –2¼ Mt of production per annum by 2030.17 However, recent conditions are conducive to lifetime extensions at mature high–cost mines that would be considering closure at mid–cycle (historical) prices, which points to something closer to the lower end of that range being the likely outcome. All else equal, these trends naturally tilt the industry wide capex outlay towards more sustaining capital. We need an abundance of both sustaining capital to mitigate the geological reality of existing operations, and development capital to nurture the next generation of copper assets – and by abundance, we mean something in the vicinity of a quarter of a trillion dollars or so this decade, as referred above.
In closing for this chapter, we reiterate our view that the price setting marginal tonne a decade hence will come from either a lower grade brownfield expansion in a lower risk jurisdiction, or a higher grade greenfield in a higher risk jurisdiction. Neither source of metal is likely to come cheaply.
