COPPER is the metal most closely linked the world GDP growth earning it the Dr. Copper name, for its health check properties in respect of the world economy. But it took a human tragedy last month to push the metal to its highest ever level, punching through $11,200 per ton.
Freeport-McMoRan reported nine fatalities at its Grasberg mine in Indonesia, following a mudslide, and with it a cessation in mining. The flip side of the all-important human angle to this event is to underline how flimsy forecasts for a balanced market this year. Even the slightest disruption in supply can throw the market into a supply deficit.
Yet there is more to copper’s record-breaking price than Grasberg. The earlier prospect of US tariffs on refined copper had triggered arbitrage opportunities between the London Metal Exchange and CME (Chicago Mercantile Exchange) as exporters rushed to deliver material to the US.
Goldman Sachs estimated only 660,000 tons of copper was in LME warehouses; Mercuria, a trading house, thinks it’s even less.
“President Trump has effectively created already a strategic reserve of copper in the US without really announcing one,” said Ivan Petev, global head of base metals at another trader, Gunvor Group. “We are very interested in how the world, ex-US, will cope with that phenomenon,” he added at the FT Metals & Mining Summit last month. He referenced China especially with its “continuous need for units”.
Given the fragility existing supply and the paucity of new significant copper supply, esimated to grow about 2.8% this year, demand for copper tends to be overlooked in significant. It is massive.
Firstly, electrification of the world will continue to heavily drive demand. Set against this year’s supply increase, smelter capacity has increased by 8.5%, says Ian Anderson, chief commercial officer at Teck Resources, the Canadian miner.
In addition, demand for electric vehicles will remain elevated – if not at previous rates of growth – while decarbonisation remains a force in the market, though not as prominent as before. “For the first time in 50 years, we’ve actually seen energy consumption rise above GDP,” says Anderson. “That’s an indicator of future demand.”
The preference among miners, if not traders of the metal, is for gently upward improvements in the copper price rather than wild, frantic swings. As optimists, however, miners can’t quite help themselves.
Paul Gait, head of strategy for Anglo American believes that the 50% improvement in the gold price over the last 12 months is an indication of where copper could go. “If you look at the copper-gold ratio … it’s the lowest copper price that we’ve ever seen since 1975,” Gait says. Put differently, the long-term copper gold ratio would imply $22,000/t for copper, he adds.
The supply side response to that would be a tidal wave of development, none of which would come on soon. That’s because it takes about 17 years on a global average to build a copper mine. Gait says in the industry should have been building around 2015, but it was embroiled in a crisis with shareholders having overspent during the previous up-cycle in metals, driven by double-digit Chinese GDP growth. Then the Pandemic struck which further interrupted the flow of new projects.
“What we’re seeing now is a period where we just don’t have those kind of shovel-ready investments in quite the order that we need in order to ensure that we have a balanced market in the near to mid-term,” says Gait. “And of course, is very, very constructive for copper prices”.
