A look into the crystal ball for copper prices

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Tuesday, April 3, 2018

After bottoming out in 2016, copper prices really came around in 2017, rising 27% to an annual average of US$2.80/lb. The price was still much lower than the red metal's 2011 boom-cycle peak, but a growing consensus over the year that the trough had passed has led mining companies to start advancing projects again in preparation for development.

Prices continued to rise into early 2018, peaking in February before falling back slightly in March, for a Q1 average of US$3.16/lb. What is in store for copper prices for the rest of 2018 and 2019? What longer-term drivers - such as the buzzing electric vehicle sector - could hold up demand further out? And will the mining project pipeline, particularly in Latin America, be able to keep up?

In this interview, CRU director of copper research and strategy Vanessa Davidson addresses these questions for BNamericas ahead of the 17th World Copper Conference taking place in Chilean capital Santiago during April 9-11.

BNamericas: What is your market balance and price outlook for the next 2-3 years?

Davidson: Volatile pricing looks set to continue in 2018, with the year beset by downside and upside risks. Peaks above US$7,000/t (US$3.175/lb) and troughs towards US$6,500/t (US$2.948/lb) seem probable. We see risks to the copper price in 2019, as sentiment corrects and the market digests yet another balanced year. However, we hold to the view that deficits will hit in the 2020's, pulling stocks lower and prices higher.

BNamericas: Electric vehicle (EV) applications are looking like a legitimate driver of consumption going forward, but exactly how much copper will be needed and when seems hard to pin down. What is your outlook, and would you say that demand forecasting in general has become even slipperier with the inclusion of electric vehicle usage?

Davidson: China has been the driving force behind copper demand growth for the last two decades but growth will moderate as China transitions away from investment-led growth. We forecast that Chinese copper demand will peak in 2023, but crucially will not see notable declines as the electric vehicles segment and automation become increasingly widespread supporting copper consumption. A 'greening' of global power and now, increasingly, transport markets has begun. Sales of electric vehicles now appear to be approaching an inflection point, with global year-on-year growth of over 25% in 2017. These trends are likely to have increasingly decisive impacts on copper markets.

This uptick in EV sales is being shaped decisively by governments, (supported by innovation and cost reduction in battery storage) who are extending generous subsidies and other support measures - ahead of outright bans planned in many countries over the medium and longer term. China is among the most influential and proactive exponent of such support. We have a bullish outlook for copper demand from EVs and the infrastructure we believe will be needed to support them. In the medium term, the EV sector will be supportive for copper consumption, with demand hitting 1Mt in the mid-2020's. However, post this copper demand from EVs will see large volume growth, and will account for around 17% of the market by 2035. This will particularly boost demand from the wire rod sector.

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BNamericas: What other risks might there be to your demand forecasts?

Davidson: Substitution remains a risk, and since the early 2000's pressure to substitute copper has gathered pace. The primary driver of this has been the difference in raw material costs between copper and competing materials, but substitution is not always a straightforward decision or process. The speed of substitution to copper has seen a large variation across product form and end use. While raw material price has been the main driver of change, other factors such as technological advancements, legislation, weight and diameter considerations, retooling costs and security of supply all need to be considered. In the medium term, we believe the pace of substitution will slow, and most price driven or technically simple substitution has already happened. Despite acute price pressure, existing barriers to exit will also curb further moves in the longer term but the threat remains.

BNamericas: What is your medium term supply side outlook, especially as it pertains to Latin America?

Davidson: In 2018, we expect to see a recovery in mine production, but there is still a threat posed by the number of labor contract negotiations in Chile and Peru, which could lead to strikes. South American refined copper output will plateau but the region's mine concentrate production is expected to continue to see strong growth.

BNamericas: There is a dearth of large undeveloped greenfield deposits but, of those identified, what are their chances of being developed in the near or medium term considering capex intensity and copper price? Can big brownfields such as Spence, projects operated by Codelco, Toromocho and others take up the slack?

Davidson: Project delays have been a feature of recent years, but over the past 12 months we have seen fewer firm projects delayed, and instead, several probable and possible projects have been brought forward and upgraded into the firm category, with permitting cleared, financing secured, and construction in progress. Even so, a historic lack of mine projects will see EW cathode production slow and will hit concentrate availability, causing refined production growth to slow over the medium-term outlook. Greenfield projects have been generally slower to respond to the better price environment and to the improved financial situation of mining companies than brownfield projects. Hence, copper production increase in the near-term is associated to brownfield project development, as well as re-openings and improved performance at existing operations, but that changes in the longer run.

CRU analysts Vanessa Davidson and Erik Heimlich presented their latest copper project pipeline in March. Courtesy of CRU.