Copper Supply Cuts Seen Gaining Pace and Magnitude

Copper supply cuts and delays as a result of measures to contain COVID-19 have become the norm in the past few weeks, but the pace of price-induced cuts could increase significantly in the coming months, according to Charlie Durant of CRU Group.

Prices for the red metal remain below the 90th percentile of global cash costs, and more challenges are ahead in the coming quarters, which could lead to further and longer disruptions.

“Other existing mine supply challenges should not be forgotten, and there remain risks to copper mining beyond COVID-19,” Durant told the Investing News Network.

“While we expect the pace and magnitude of supply cuts to gather momentum in the coming months, the near-term decline in demand is likely to outpace cuts to supply.” Thus far temporary output suspensions due to government regulations are a small fraction of the likely demand impact.

Over the longer term, production from existing copper mines is forecast to decline by 2024, and mine projects will be key to sustaining supply growth, according to the expert.

“The difficulty is that at today’s low prices, these projects are not getting the green light to move into the construction phase. However, most existing mines remain cash positive, even at current prices.”

After weeks trading below the US$5,000 per tonne mark, copper prices rebounded on Tuesday (April 7), changing hands for US$5,067.50. CRU Group is expecting copper prices to average US$4,850 in Q2.

Durant said that with demand falling so rapidly in 2020, this year will see a surplus.

“The question remains how large the inventory build will be,” he added. “Without closures or significant disruptions to global mining, a surplus of 1 million tonnes is possible.”

Even assuming a recovery led by government stimulus later in the year, China is likely to see its first year of negative growth in copper demand since 2006. According to CRU Group, Chinese refined copper consumption declined by over 20 percent year-on-year in the first quarter.

The Asian country is the top consumer of the red metal, but 30 percent of China’s copper demand is exported in the form of semi-fabricated products, plus wire, cable and copper-containing finished goods.

“Consequently, the negative demand shock from the spread of COVID-19 to the rest of the world is a threat to any recovery in China also,” he said. “The impact on demand outside of China will be pronounced, and there is a risk that demand declines by double digits this year as the global economic downturn takes hold.”

Looking at what key catalysts investors should pay attention to in Q2, Durant said April is shaping up to be a critical month for the global economy and copper market, as the market waits to see whether recent initiatives slow the spread of COVID-19 outside China.

“The focus is now on the depth and duration of the current global economic downturn, which is expected to provide significant near-term headwinds for copper prices, despite China’s recovery,” he added.

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

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.