Woodmac: Copper Supply at Risk as Coronavirus Measures Tighten

- March 26th, 2020

There are factors posing a significant risk to global mine supply and project development, according to Woodmac’s Nick Pickens.

The COVID-19 outbreak has led many countries around the world to take up strict measures to contain the virus, including copper powerhouses Chile and Peru — they are now in states of emergency, with several miners suspending operations.

Adding pressure to copper supply is a fall in copper prices, which are down more than 20 percent since January. These factors are posing significant risks to global mine supply and project development, according to a report from Wood Mackenzie Research Director Nick Pickens.

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. However, we believe there is a significant risk that disruptions will escalate, and breach 5 percent this year.”

 

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In Peru, the government imposed a 15 day national quarantine on March 19 to prevent the spread of the pandemic, while Chile declared a “state of catastrophe” on the same day.

“All out closures in Peru and Chile for 15 days, would see 1.5 percent wiped from global annual (copper) supply. While this is significant, it would be absorbed by our disruption allowance,” Pickens said. “It is also not likely to be long enough to trigger force majeure on shipments.”

It would take 45 days to disrupt 5 percent of supply from these countries, equivalent to Woodmac’s full-year disruption allowance of just over 1 million tonnes. But with Spain and Italy set to extend quarantine measures in Europe, a longer disruption in South America doesn’t seem unlikely.

However, as mentioned, Woodmac assumes mine supply will not be halted completely in Peru and Chile. “The early indications are that some major companies in Peru and Chile are managing to produce under the restrictions,” Pickens said.

But Peru and Chile are not the only countries where mining has been disrupted — there have also been temporary cutbacks and risks to suspensions in Canada, the Democratic Republic of Congo and Australia.

“If the need for containment leads to wholesale lockdown of mine sites, and this Latin America disruption is replicated in Africa, North America and Australia, this would have catastrophic consequences for global copper mine supply,” he said.

Lockdown and preventive measures are not the only aspect to consider — the decline in copper prices could also put supply at risk, as it would not incentivize miners to restart or move forward with projects.

“Temporary closures and construction deferrals have accelerated due to virus containment,” he said. “However, a sustained period of lower prices could make these more permanent.”

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In recent weeks, companies with major copper projects have announced project and expansion delays. Assets facing slowdowns include Anglo American’s (LSE:AAL,OTCQX:AAUKF) US$5 billion Quellaveco, Teck Resources’ (TSX:TECK.A,NYSE:TECK) US$4.7 billion Quebrada Blanca Phase 2 and Rio Tinto’s (ASX:RIO,LSE:RIO,NYSE:RIO) US$7 billion Oyu Tolgoi expansion.

Combined, these projects account for a third of the total net growth expected over the next three years, according to Woodmac.

“With demand contracting and prices plummeting, an economic supply response now seems likely,” Pickens said. “The disruption caused by virus containment has been the catalyst for a quicker reaction than is typical by the mining industry in a downturn.”

However, he added that the impact on supply could be less than was seen in previous downturns, owing to a lower starting point.

Looking over to the refined market, the expert expects production to decline this year due to a fall in mine supply, but also due to a drop in production from scrap and blister units.

For price, Woodmac estimates average annual copper prices will be supported at around US$4,850 per tonne over the remainder of the year. Prices were trading at US$4,754 on Wednesday (March 25).

But there’s a silver lining for miners —  as the oil price plummets, a reduction in cost could help ease margins. Fuel represents, on average, 7 percent of overall mine site costs.

“Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant,” Pickens added.

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

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