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Copper supply faces struggle to keep up with growing demand

A deficit in the copper market is set to deepen over the next several years as supply of the widely used metal struggles to keep up with strong demand from the power and construction sectors, compounded by the proliferation of electric vehicles.

"Refined output is expected to increase by 4.3% year on year to 24.7 million tonnes in 2021 after decreasing by 2.1% to 23.6 Mt in 2020, primarily as a result of disruptions caused by the coronavirus pandemic," S&P Global Market Intelligence commodity analyst Thomas Rutland said.

Work stoppages due to measures designed to curb the spread of the coronavirus have stalled existing capacity and have delayed investments with long-term repercussions for supply. Chile has been the worst affected followed by the U.S. and Peru.

The second quarter bore the brunt of disruption to refined and mined production, but global output should be similar to 2019 levels in the third and fourth quarters, according to Rutland. "Beyond 2020, we forecast that consumption will outstrip production over the period to 2024, resulting in a growing refined market deficit and increasing copper prices."

"Refined production output will be hindered during this period by slowing mine production growth rates unless there is significant investment in the copper project pipeline," Rutland added.

Fitch Solutions expects the copper market deficit to ease from an estimated 416,000 tonnes in 2019 to 299,000 tonnes in 2020 before widening again from 2022, according to a mid-September report. The analytics provider forecast a shortfall of 489,000 tonnes in 2024, rising to 510,000 tonnes in 2027.

SNL Image
Production from the world's largest copper mine, BHP Group's Escondida in northern Chile, is expected to tumble by between 13% and 21% in fiscal 2021 as grades decline.
Source: Oliver Llaneza Hesse/Hulton Archive via Getty Images

As of late September, 2.9% of annual global supply remained suspended due to the pandemic, with Chile and Peru accounting for more than half of the missing 702,000 tonnes of output estimated for 2020, VTB Capital analysts wrote in a Sept. 28 note. In the U.S., 217,000 tonnes of capacity was shuttered, according to the Russian government-controlled bank.

This leaves miners playing catch-up to develop future supplies of the metal with demand only mildly impacted by the downturn caused by the pandemic. The price of copper has climbed 6.9% since the start of 2020, defying a massive slump in March, and stood at US$6,574 per tonne as of Sept. 29.

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A rising tide of electrification, as many countries seek to lower their emissions through developing new technologies, promises robust demand for years to come. Global copper production would need to rise by between 3% and 6% per annum by 2030 for countries to meet the targets of the Paris Agreement on climate change, according to a Sept. 14 Bernstein Research note. At the same time, rising environmental standards will likely create headwinds for mining companies.

Fitch expects mine output to rise at an average annual rate of 3.2% from 2020 to 2029, from 20.4 Mt to 27.7 Mt. Bernstein, however, identifies 11 reasons why copper supply could disappoint and warnes consensus forecasts overpromise and underdeliver.

New mines needed

Expansion of existing mines accounts for the majority of new copper production scheduled to come online by 2024, after which new projects will be required to bridge the growing gap expected by analysts. However, this will require significant investment amid a strong performance from other commodities during the pandemic, most notably gold.

Some copper projects benefit from the production of valuable byproducts. Revenues are chiefly bolstered by gold and molybdenum, followed by silver and cobalt, according to Market Intelligence commodities analyst Gregory Rodwell.

Copper is not only vital to all types of batteries but also to other components of electric vehicles, such as motors and charging equipment, Bernstein noted. Thus, copper is expected to dominate the surge in demand for battery metals by volume over the coming decades.

Following a "poor decade" of exploration for the industry, BHP Group expects a dearth of high-quality development projects to support prices in coming years as grades decline, resources are mined and input costs rise, according to the company's fiscal 2020 annual report released in mid-September.

Exploration lagging

In terms of exploration budgets, copper was the worst-performing commodity in 2020, according to Market Intelligence mining analyst Kevin Murphy. "While exploration for all commodities was impacted by COVID due to lockdowns and other restrictions, the steep copper price drop in March saw a lot of caution enter the exploration sector," Murphy said.

"Most companies were budgeting for a longer recovery in price than what occurred. So while copper prices recovered well, and quite quickly, copper budgets did not," Murphy explained. "That said, we do expect copper to erase the losses of 2020 in 2021 as delayed and deferred programs run over into the new year."

In the shorter term, demand from China's end-copper consumers took an unexpected slip in September, according to Shanghai Metals Market. Its purchasing managers' index covering the country's construction, power, electronics, transport and home appliance sectors dipped 0.48 of a point to 49.58 in September as compared to August.

The reading is likely to tick up by 0.68 to 50.26 in October as overseas demand improves with the approach of the Christmas holidays, Shanghai Metals Market said.