I had the opportunity to chat with Stockhead’s Josh Chiat to share my thoughts on the copper market and the forces driving it to its current record highs. The article is titled “Is This Copper Run Overcooked?” and can be viewed below by clicking on the link below:
https://stockhead.com.au/resources/is-this-copper-run-overcooked/
I have shared an extract below:
Speculator’s dream a producer’s nightmare?
Mining expert Gavin Wendt, the founder of Sydney research firm MineLife, believes there are fundamental drivers pushing copper higher.
But he said much of the recent price run was down to the re-emergence of speculative investors who had abandoned the copper market last year.
“We have heard all about the positive demand for copper, the fundamentals and the fact that supply is challenged – Will we be able to keep up with demand?” Wendt told Stockhead.
“And I think people started to doubt that (last year) because the price weakened off, but I think you have to bear in mind that apart from traditional end user demand for copper … also there’s a big speculative element so a lot of funds take positions in the copper market.
“I think that’s been the biggest driver and it’s transcended some of those factors that would normally weaken the copper price like the US dollar.”
There have been supply challenges putting pressure on copper prices in the short term.
The biggest hit to copper supply this year has been the early closure due to community opposition of First Quantum’s Cobre Panama mine — at 350,000tpa around 4% of global primary metal supply.
In the world’s top producing jurisdiction, Chile, production was down 0.7% YoY in March to 433,300t.
Other physical market factors have played a role, like overcapacity among Chinese smelters pushing treatment and refining charges negative.
But the market is also fairly balanced … for now.
“Has copper already outrun those demand-supply factors? Sure, the big picture is still there. But investors are not necessarily interested in that right now,” Wendt noted.
“End users should be and they’re concerned, but right now investors are concerned with the here and now and if they see that the market might be looking overpriced there’s certainly potential for money to come out of the sector.”
Long term deficit
But Wendt still subscribes to the idea copper will see growing supply shortages from the energy transition, which will require an extraordinary lift in copper demand for poles and wire, EVs and renewable generation.
Discoveries of global scale are virtually non-existent and those reasonably sized mid-tier deposits — many of which are deep and low in grade — will need higher prices to encourage mining companies to invest and banks to provide finance.
The challenges facing the delivery of new projects was summed up in BHP (ASX: BHP) and its $64.5bn bid for Anglo American, which would make the world’s biggest miner also the world’s largest copper producer.
It shows those with the means to develop new sources of the metal would rather pay for existing tonnes than bring new ones to market.
“If they want exposure to copper now I think there’s that feeling, if we want to bump up our proportion of earnings that come from copper we better go out and start buying some of these assets. Because of the timeframe to commission new mines, we can’t just rely on our organic growth profile or our exploration team,” Wendt said.
“Probably over the years mining companies have cut back on exploration because it’s a risky business … and also they know that there’s going to be hot competition for assets because they’re thinking ‘well, all of our peers are thinking the same thing’.
“So not only will we secure that asset or those assets for ourselves, but it means our competitors won’t be able to get their hands on them.”
While a mine acquired in a deal with a known position in the global cost curve will contribute to profits straight away, a new discovery could take years to be commissioned.
That’s before the riskiest phase — ramp up — which often lasts longer and costs far more than feasibility studies envisage.