Copper is most closely linked to world GDP growth, earning the nickname “Dr Copper” for its health check properties in respect of the world economy. But it took a human tragedy in September to push the metal to its highest level yet; it punched through $11,200/t.
US mining firm Freeport-McMoRan reported seven fatalities at its Grasberg mine in Indonesia following a mudslide. The incident caused a month-long cessation in mining. The flip side of the all-important human angle to this event is to underline how flimsy forecasts were for a balanced market this year. Even the slightest disruption 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 (LME) and the Chicago Mercantile Exchange as exporters rushed to deliver material to the US.
Goldman Sachs estimated that LME warehouses had only 660,000t of copper. Trading house Mercuria suggests that number is even lower. According to Ivan Petev, global head of base metals at another trader, Gunvor Group, US President Donald Trump “has effectively already created a strategic reserve of copper in the US without really announcing one. We are very interested in how the world, ex-US, will cope with that phenomenon.”
At the FT Metals & Mining Summit in October he referenced China especially with its “continuous need for units”.
Given the fragility of existing stocks and the paucity of new significant copper supply, which is estimated to grow about 2.8% this year, the significance of demand for copper tends to be overlooked, but it is huge.
For one thing, electrification of the world will continue to drive demand heavily. Set against this year’s supply increase, smelter capacity has increased by 8.5%, says Canadian miner Teck Resources chief commercial officer Ian Anderson.
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 seen energy consumption rise above GDP,” says Anderson. “That’s an indicator of future demand.”
The preference among miners, if not among 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.
Anglo American head of strategy Paul Gait says the 50% improvement in the gold price over the past 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 seen since 1975.” Put differently, the long-term copper-gold ratio would imply $22,000/t for copper, he says.
The supply-side response to that would be a tidal wave of development, none of which would come on stream soon. That’s because it takes about 17 years on a global average to build a copper mine. Gait says the industry should have been building in about 2015, but it was embroiled in a crisis. Shareholders had overspent during the previous up-cycle in metals, driven by double-digit Chinese GDP growth. Then the pandemic struck, further interrupting the flow of new projects.
“What we’re seeing now is a period in which we just don’t have the kinds of shovel-ready investments we need to ensure that we have a balanced market in the near to medium term,” says Gait. “And of course, it is very constructive for copper prices.” — David McKay
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