Benedikt Sobotka of ERG said the copper market has entered a prolonged period of structural undersupply, and it will be hugely supportive for prices.
An extended period of structural undersupply is expected in the copper space, with prices potentially topping US$7,000 per tonne starting at some point in 2021, according to the CEO of Eurasian Resources Group (ERG), Benedikt Sobotka.
Copper started the year above the US$6,100 mark, touching US$6,300 in mid-January. But the impact of the coronavirus hit the red metal market hard, with prices plummeting to US$4,617.50 in March.
The second quarter of the year told a different story for copper. An expected recovery in demand from China, the world’s top consumer, paired with supply disruptions, has helped the base metal trend upwards in the last three months. Copper is currently trading at US$6,022.50.
“Visible copper inventories are down by an astounding 33 percent year-on-year, copper concentrate treatment and refining charges have narrowed to the lowest level since 2012 and CIF Shanghai cathode premiums hit a two-year peak last month,” Sobotka explained. “The evidence points to a tight market, which justifies the current price level.”
South America, in particular copper king Chile, has been battling against the pandemic, with governments imposing strict lockdown and containment measures as cases keep increasing.
To date, 700,000 tonnes of mined copper output have been lost, with further disruptions looming in the region, according to ERG.
Even more significant are the losses on the copper scrap supply side, with trade data indicating a contraction of more than 50 percent year-on-year in April shipments. Copper scrap accounts for around a third of total copper consumption, including direct-use scrap.
“Looking even further ahead, the supply impact of the coronavirus will extend far beyond this year,” Sobotka said. “2020 has already seen capex guidance cuts from copper miners and the mine project pipeline is shrinking due to lockdown-related delays.”
On the demand side for copper, the CEO of ERG said the pace of recovery has beaten his expectations, especially in China, where data shows demand was not destroyed, but merely delayed.
“I expect such pent-up demand to drive a similarly sharp recovery in the rest of the world during the second half of 2020,” he said. “Moreover, the unprecedented levels of stimulus across the world are set to sustain this recovery in the longer term, especially from the copper-hungry green energy and digital economy sectors, which have been singled out for investment by many governments.”
For ERG, the electric vehicle sector alone is seen adding 1.5 million tonnes of cumulative demand during the next decade.
“Another often-overlooked growth sector is the new digital economy,” Sobotka said. “China’s State Grid plans to invest US$3.5 billion in digital infrastructure in 2020, and we expect these power-intensive data centres and 5G networks to drive a growing need to expand grid capacity.”
He also said that as companies, governments and organizations look for ways to try to protect people from epidemics, copper-coated surfaces may prove effective and drive demand.
“The latest developments in the copper market lead to believe that we have just entered a prolonged period of structural undersupply,” Sobotka said. “This will of course be hugely supportive to prices.”
In the Democratic Republic of Congo, ERG mines copper and cobalt, processing the ore at the Boss Mining, Frontier and Comide operations. Additionally, the company has a number of development and near-production assets in the African country. In Zambia, ERG owns Chambishi Metals, its central cobalt and copper refinery.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.