The annual Cesco Week gathering for the global copper industry starts Monday in Santiago.
For the first time in five years, attendees arriving in the Chilean capital can reflect on a copper price that is higher than at the previous year’s event. However, optimism that 2017 represents a turning point in the market should be tempered by the realisation that any sustained recovery in the copper price is likely to be steady rather than dramatic.
After six consecutive years of surplus, a slight deficit is forecast to emerge in the refined copper market during 2017. In spite of this, any upside to prices this year is likely to be limited by a backdrop of rising US interest rates and an appreciating dollar.
Over the medium term, continued supply growth together with conservative demand projections mean that inventories of refined copper accumulated over recent years will only be drawn down gradually. It is therefore likely to be early in the next decade before meaningful tightness in the global copper market supports a significant spike in the metal, used in everything from power grids to household wiring.
The prospect of a boost to demand from President Trump’s infrastructure spending plans has contributed to positive market sentiment over recent months. Whether or not these plans come to fruition and what effect the new American administration’s proposed trade policies may have on global demand are likely to be longer term concerns for the market.
In reality, it will be events in China, which accounts for close to half of global demand for refined copper that will be pivotal to the consumption picture in the immediate future.
Healthy demand across the electrical network, transport, and appliances sectors led to Chinese refined copper consumption outperforming expectations during 2016. However, concerns remain that the credit-fuelled stimulus and infrastructure investment that contributed to this strong performance may be borrowing growth potential from future years.
It is also likely that higher copper prices will encourage the supply and use of scrap which will limit requirements for primary metal. Overall, Chinese refined copper consumption is expected to grow by an average of about 2 per cent per annum over the next five years.
Elsewhere, a bright outlook for demand in India and south-east Asian countries will be balanced by lacklustre growth in the more mature economies. On a global basis demand for refined copper is expected to grow at 1.7 per cent per annum over the 2016-21 period.
On the supply side, global copper mine output is forecast to fall in 2017 as the pace of new project development slows and existing producers focus on producing “profitable tonnes” rather than maximising volumes. Mine output has been further constrained over recent months due to disruptions at several large producers.
Growth in the supply of mined copper is forecast to resume in 2018 as projects such as brownfield expansions at Escondida in Chile, the restart of Glencore’s African operations and First Quantum Minerals’ new Cobre Panama mine come online and increase output. It is not until early in the next decade that lower grades and reserve depletion at existing mines will see global mine output fall significantly below market requirements unless new mine construction is approved.
Where and when these new mines will be built is one of the key questions that will be exercising the minds of those attending Cesco week. The recent and well-publicised disruptions to mine supply at Escondida, Grasberg in Indonesia and Cerro Verde in Peru vividly illustrate the challenges that the copper mining industry faces. Namely, in terms of controlling costs in order to profitably process lower grade ores and working in countries with increasingly complex legislative environments.
On average, the copper price is only forecast to rise slowly towards the sort of levels that are required to encourage significant new project development. Mining companies that are more than ever focused on maintaining capital spend and returning value to shareholders throughout each mining cycle, are therefore unlikely to rush headlong into another wave of mine building.
Gradual demand growth and constrained supply will combine to paint a strong fundamental picture for copper over the long-term. However, those waiting for prices to rise significantly above current levels on a sustained basis may have to be patient a little longer.
The Commodities Note is an online commentary on the industry from the Financial Times
Paul Benjamin, is principal analyst, copper markets, at Wood Mackenzie, a consultancy
