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Current copper prices do not reflect fair value


Essential IR Insights Newsletter - April 2023


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According to Market Intelligence, April 2023


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Current copper prices do not reflect fair value

Whilethe biggest global event for the copper industry opened its doors in Chile, themetal itself had a rather hard landing in the week to April 8, with prices hittingthe lowest level in a month.

The redmetal dropped to US$4,641 per tonne, its lowest since March 1, and even though therewas a slight rebound, the London Metal Exchange's three-month contract for copperstood at US$4,655 per tonne by closing April 8, down 3.7% compared to the previousweek.

Copperwas once again not the only metal that booked a price slump that week.

Zinchad an equally bad run, falling 4.4% over the week to US$1,766 per tonne, iron oredeclined 1.3% to US$53.30 per tonne and aluminum finished the week 0.8% lower atUS$1,523 per tonne.

Goldand nickel were the only gainers that period, up 2.1% to US$1,240 per ounce and1.9% to US$8,565 per tonne, respectively.

Copper,however, had to digest more than just another price drop. In fact, more concerningwere predictions for its performance ahead.

BofA Merrill Lynch: 'another leglower in copper'

Chinain particular tarnished the mood, not only among analysts but also at last week'sWorld Copper Conference that took place in Santiago, Chile. The event is the biggestof its kind for players in the industry and for more than a decade it had a reputationas a rather flamboyant conference. However, reports suggested that this year ithad significantly shrunk in size, widely reflecting on the difficult prospects manymarket observers had outlined for the industry.

Bankof America Merrill Lynch's European Equity Strategy team noted April 5 that "thelows are in for many commodities" and that "similarly, we may have seenthe lows in many commodity markets."

"Ourcommodity strategists believe that is the case for oil and argue that most of themined commodities are approaching the tail end of a bear market. That being said,they do look for another leg lower in copper and expect a choppy profile ahead foroil prices. With the [emerging markets] and commodity asset classes highly correlatedtheir fate is likely to be entwined."

Additionally,there was speculation that China is preparing to raise its copper exports to putstockpiles back onto the global market, which were run up at the height of the Chineseconstruction and production boom. This would further deteriorate the volatile priceenvironment for copper, which has continued to suffer setbacks for various monthsnow.

Previously,there were still hopes that prices might rebound if slowing demand from China couldbe offset by global output cuts. Instead, a focus on cost cutting now has becomea theme, feedback from the World Copper Conference showed.

Justdays earlier, the annual GFMS Copper Survey had left a bitter taste, pointing to2016 becoming the fifth consecutive year of a surplus due to excess copper production,set to reach a surplus of 150,000 tonnes compared to 363,000 tonnes of surplus in2015.

Current prices do not representfair value

Nonetheless,others are convinced that the underlying value of copper will eventually turn thecoin.

At theconference in Santiago, Ivanhoe MinesLtd. Executive Chairman Robert Friedland reiterated his view that copperis set to fuel global growth in the long term. His stance was supported by the recentlaunch of Tesla Motors' Model 3 electric vehicle, which underpinned the appetitefor electric cars when the company saw more than US$10 billion worth of preordersin just a few days.

According to Friedman, production for each of the cars will resultin some 65 kilograms copper being used. With 100,000 orders in the books so far,Tesla's new model alone would consume 6,500 tonnes of copper. By 2030, however,it is estimated that batteries in electric cars will use some 927,000 tonnes ofcopper a year.

Investec commented April 11 that the rise in demand for suchvehicles had taken most people by surprise. "Hopefully this will feed throughto increased demand for copper which will offset the fall in demand from China,"the team stated.

Bernstein analyst Paul Gait on April 4 ran his analysis by otherfactors, transaction volumes being one of them.

"There is a reason that the recent asset transactions thathave taken place in the industry have had a far higher implied copper price thanthat implied by the market; whilst share prices are currently dogged by poor sentiment,balance sheet worries and of course low commodity prices, industry players clearlyshare our view that current commodity prices, particularly for copper, do not representfair value."

"The copper industry exhibits most prominently several structuralfeatures that are also present for other commodities such as grade declines, increasingneed to mine underground and increasing need to mine in frontier locations. As such,it is our belief that the incremental unit of supply will only become more expensiveto produce over time. And as ever, we would stress that it is this incremental unitof supply that needs to be covered by the copper price."

As a result of this, Gait concluded that higher quality copperunits "should make rent."

"Indeed historically copper has produced the best marginsfor its producers out of all the major industrial commodities," the analystflagged.