Copper Smelter Cuts Ahead, Mine Supply Will be Resilient

As global economies slowly begin to reopen, many investors are wondering about the actual impact of the COVID-19 pandemic on base metals and what’s ahead in 2020.

For Open Mineral, the world is set to see a slower-than-expected return to “normality,” with a very deep recession lasting longer than anticipated.

In a webinar hosted by the firm to discuss the concentrate markets for base metals, CEO Boris Eykher said he expects demand will be impacted negatively for a long period of time, with base metals remaining under pressure.

Copper, zinc and lead all have somewhat similar stories, but with specific trends, which Head of Research Ryan Cochrane explained in detail. Here’s an overview of what he said about each of these base metals.

Copper situation beginning to change

The initial impact of COVID-19 on the copper concentrate market was a reduction in demand as top consumer and producer China entered a lockdown. However, now the situation has started to change.

“With China slowly ramping up while the rest of the world is in lockdown, concentrate supply has tightened,” Cochrane said during the webinar.

He explained that Chinese copper smelter revenues have collapsed in the past 12 months, with plummeting sulfuric acid prices being the main driver.

In fact, from the beginning of this year, Chinese smelters have been receiving no revenue from sulfuric acid, and in many provinces they are selling it at a loss, Cochrane said.

“Now with the impact of COVID-19, Chinese smelters are going to be progressively pinched. I would think smelter cuts on the private side could be coming in the coming weeks and months, and I wouldn’t be surprised to see maintenance from some of the larger players,” he said.

“This should in theory put a floor in how low treatment charges (TCs) could fall for copper.”

Zinc concentrate market extremely tight

The story for zinc is not much brighter, with its concentrate market probably being the most tight of all, according to Cochrane.

“Chinese smelters had a smaller amount of zinc stocks in anticipation of a lot of supply in 2020, and this hasn’t materialized,” he said. “COVID-19 disruptions have accelerated tightness in the concentrate market, and Chinese zinc miners have not come back as strong as expected.”

As a result, smelters are sourcing actively for imported concentrate, which has been more beneficial for them than treating domestic concentrate.

“I could see TCs falling even further in the next coming weeks or months,” Cochrane said.

Lead dynamics partially determined by silver

Sister metal lead’s story is much the same, with concentrate supply tightening, but in a softer way than zinc.

“The key difference for the lead smelters is that they have held relatively higher concentrate lead stock than the zinc smelters, and there’s a large secondary component in this market,” Cochrane said.

For lead, it is important to consider silver prices, which have been hovering around the US$15 per ounce mark after touching a low of US$12 earlier this year. Lead is mined together with silver, so dynamics in that market also impact the base metal.

Moving forward, Cochrane expects high silver-lead concentrates, which are likely to see a strong value appreciation.

Overall outlook for base metals

Looking ahead at the entire base metals complex, Cochrane said he expects a fall in both treatment and refining charges to continue in the short term.

“Especially if industries have access to credit to continue to build inventory,” he said.

For Cochrane it is clear that mine supply will be much lower than expectations even six week ago. “But mine supply will likely be resilient given deflationary expectations,” he said.

For the expert, base metals will remain under pressure, with gold and silver likely to outperform.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.