Copper in focus: Cu at the top

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 20 Nov 2017   Posted by admin


BY ELIZABETH FABRI

 

COPPER is in favour as demand picks up in China, while electric vehicle and the renewables boom looks to build sustainable price momentum into the future. Yet the base metal, as is the case for many commodities in 2017, has also been defined by its volatility. Will the good time continue? 

 

Copper has been a particularly interesting commodity to watch throughout the 2017 year.

On the back of sudden price gains in late 2016, the base metal had a volatile start to the year, continuing its upswing in the first few months, (due to supply disruptions at three of the world’s largest mines), before plummeting to three-month lows in April.

As analysts predicted, the slump was short-lived with prices surging again in July on renewed optimism amid demand growth in China and a weaker US dollar.

By mid-October, prices spiked further to $US7186 a tonne, before settling at $6800 a tonne at the end of the month; still a 24 per cent increase on January levels.

While there has been much debate on where the copper will settle moving into the New Year, a common thread among analysts is that the long-term fundamentals for the metal remain strong.

KPMG national and global copper leader Maritza Araneda said despite recent volatility prices were headed in the right direction.

“In my view, the market should swing into a deficit (undersupply) position in early 2018, meaning that copper prices should not drop below current price levels,” Ms Araneda said.

“This is good news for miners who have gone through difficult times over the last two years and have had to reduce costs to manage their cash flows.

“There is also potential for further upside in the near term; supply disruptions may continue in the second half of 2018, as a number of mines in Chile have worker contracts up for renewal.

“Accordingly, gradual price increases should start to be more pronounced from Q3 2018 onwards and this time the higher prices will be here to stay.”

S&P Market Intelligence senior research analyst Adam Webb was also optimistic, but warned of increased year-on-year mining costs.

Mr Webb said since early last year, which marked an arrest in the copper price decline that had been in evidence since 2011, there has been less pressure to cut costs at copper mining operations.

“However, since early 2016 many local producer currencies have strengthened against the US dollar, alongside a strengthening oil price, which has led to some upward pressure on copper mining costs,” Mr Webb said.

“Total cash costs in the copper-mining sector are expected to be approximately 6 per cent higher in 2017 compared with 2016.”

Looking ahead into 2018, Mr Webb expected only 2 per cent of copper supply to have an AISC above the forecast copper price for the year, signalling little pressure for copper miners to cut production.

“We expect profit margins to end this year significantly higher than in 2016, and that those margins will be preserved into 2018 and 2019,” he said.

Deloitte Energy & Resources industry group audit partner Ryan Hansen said copper futures on COMEX trading were currently at their highest since February 2014, with the market bullish for ‘good reasons’.

“Copper’s supply/demand fundamentals are some of the best in the commodity pack,” Mr Hansen said.


“You have the combination of long-term structural supply constraints (falling ore grades, supply disruptions at key copper mine operations, slowing global mine supply growth, shortage of world class copper deposits, etc) together with some decent demand side support.


“Copper’s a classic ‘bellwether’ commodity with copper demand and prices highly correlated with economic activity.”

However, Mr Hansen said there was “significant caution to be had” around the large quantity of speculative capital in copper.

“There’s a sense copper prices are currently running ahead of fundamentals and are not sustainable at this level,” he said.

“The risk of so much hot money going into copper is it can easily be pulled out if perceived returns are higher elsewhere or there’s a negative economic shock somewhere.”

Mr Hansen said the big concern was a slowdown in China’s property sector, but if this corrected itself, so too will copper demand and pricing.

 

 

 

 

Renewed focus

Armed with this knowledge, global producers such as BHP were shining a light on their current copper operations and pathways to ramp up production to meet demand.

At the LME Week Bloomberg Forum in London early November, BHP Americas operations president Daniel Malchuk said the miner was actively looking to add more copper resources to its portfolio.

“Copper has had great fundamentals for some time, and great potential due to the rapid rise in renewables and electric vehicles,” Mr Malchuk said.

“Solar requires about five kilograms of copper per kilowatt – that’s more than double the copper intensity than alternative forms of generation.

“Now turning to the highways, a hybrid car uses 40 kilograms of copper – that’s twice the amount of copper a regular petrol car uses.

“This is an enormous amount of copper to source.”

Mr Malchuk said BHP was well placed to support increased copper supply but faced a number of challenges including; declining grades, deeper deposits, harder ore, labour productivity, water scarcity, and higher expectations from host governments and communities.

“Grade decline alone has huge ramifications; industry grades are expected to decline by 17 per cent according to Wood Mackenzie data over the next decade,” he said.

“Ageing mines require more effort and cost to deliver the same production.”

“There will be a growing need for desalinated water to process the higher volumes of lower?grade ore.”

Mr Malchuk said BHP was investing in exploration to uncover potential new discoveries closer to the surface.

“Based on total refined copper output, the value of the copper market could increase by over 50 per cent by 2035 – an opportunity worth seizing,” he said.

“Now you see why copper is firmly on our radar.”