A rebound in the price of copper since mid-March should be supported in the near term, as declines in global mining production are offsetting weak demand caused by the coronavirus pandemic, according to analysts.
"Part of the drop in demand in the copper market has been mitigated by a drop in supply as well due to COVID-19," Exploration Insights metal analyst Joe Mazumdar said during an investor webinar June 26.
Mazumdar said copper demand has been inextricably linked to the impact of the pandemic on industrial production, especially in China, and the effects on mine supply have been most pronounced in Chile and Peru.
"Chile in the last half of 2019 was producing around 500,000 mt per month on average, and in the first 4 months of 2020, as these companies kept producing at a social distancing way of mining, they reduced production down by about 5%," he said. "There was a bigger issue in Peru as its drop looks to be about 20-25% from the average monthly rate at the end of 2019."
Mazumdar said the price of copper has rebounded considerably since collapsing in mid-March, and ongoing pressure on supply would likely sustain the recovery.
"There is a lot of supply-side issues in the medium term that would be positive for the copper price," he said.
The COMEX copper spot price settled at 266.25 cents June 25, up from the 2020 low of 211.95 cents on March 23 as the US began implementing pandemic-related lockdown restrictions.
Analysts with Commerzbank said the pandemic's impact on mining in Chile and Peru was primarily responsible for the positive copper market outlook.
"The concerns about a massive production surplus on the copper market that were prevailing in March have now given way to the expectation of a deficit," Commerzbank analyst Eugen Weinberg said in a research note June 26. "In response, the copper price has climbed to a five-month high of just shy of $5,950/mt."
Jefferies Equity Research analysts also improved their copper forecast based on improving demand and supply constraints.
"Demand in the US and Europe should recover as lockdowns are hopefully lifted, and Chinese demand should continue to improve due to stimulus measures," the analysts said in a June 23 research note. "Meanwhile, supply constraints are significant and structural as mines are depleting and the industry's project pipeline is relatively thin."
Jefferies forecast an average copper price of 285 cents/lb for 2021.
Long-term demand looks bullish
Mazumdar said copper supply and demand could follow different trajectories over the next five years as copper applications expand and mining production slows.
"In the long-term on the demand side, most people are looking at higher-intensity copper usage, higher copper loading in vehicles with the advent of electric vehicles and potentially higher infrastructure spending as well, so that is something we see on the demand side that might be about three to five years out," Mazumdar said.
Meanwhile, Mazumdar said large copper miners such as Codelco and Glencore are facing challenges that may slow production, development and expansion.
"On the supply side, what I see is companies like Codelco, which puts out about 8-9% of the world's copper production, need about $20 billion over the next 10 years just to modernize their current operations to sustain this production," he said. "There is a risk there that they may not be able to meet it."
Mazumdar said Glencore's operations in Africa were facing geopolitical challenges that presented risks. The company's operations in Argentina were also beginning to wind down, he added.
Copper mining discoveries have also declined since 2010, a trend that is expected to continue into the next decade, Mazumdar added.
"Just pumping money into exploration has not generated more projects, so that's another long-term issue for the copper market," he said. "If we don't have visibility into these projects right now, given how long it takes to permit and develop these projects, we could have an issue with copper supply over the next decade because of the lack of discoveries."
