Is the Copper Bull Set to Rebound?

Navigating turbulence amidst divergent forecasts

By Luke Holland

Caught amidst a global recession, the ongoing green energy transition and increasing demand for electric vehicles, copper’s price dynamics have been influenced by a delicate balance of market forces currently at play within the commodity arena.

Copper prices have shown volatility in 2023, starting above $8,000/MT and reaching a year-to-date high of $9,356/MT in January, before declining back to $8,315/MT by the end of Q2. Despite initial strength, copper prices faced challenges due to a weakening Chinese economy and inflation concerns globally. While China’s macroeconomic weakness impacted copper prices, demand held relatively well, supported by green energy applications like electric vehicles (EVs) and renewables.

Global financial powerhouse, Goldman Sachs, forecasts copper demand from the EV sector will surpass 1 million tonnes in 2023 and increase to 1.5 million tonnes by 2025, a sentiment which lends confidence to the anticipated bullish momentum.

EV production accounted for about two-thirds of the global copper demand growth last year, and it is projected to contribute around 27% of additional copper consumption over the next decade. Analysts at the powerhouse convey optimism in relation to the EV space, in particular the Chinese market attributing it to lower prices and a high demand that has been building up throughout 2023. However, turbulence remains a feature in the market. In Q2 of 2023 alone, benchmark copper prices on the London Metal Exchange experienced a 7.5% decline, primarily due to a slow recovery in China and concerns about global economic growth. Additionally, according to industry, the amount of copper utilized in the EV space may reduce from 73kg per unit (2022) to 65kg per unit (2030). However, despite this potential reduction, the growing adoption of electric vehicles remains a crucial factor shaping the copper market’s bullish prospects.

A key jurisdiction in the copper market, Chile recently announced the introduction of a new royalty bill starting early next year, capping the effective tax rate at 46.5% for copper miners. This move will align Chile’s tax rates with other competing jurisdictions like Argentina, Australia, Canada, and Peru. Currently, miners in Chile face tax rates of over 50%.

According to Goldman Sachs analysts, the new legislation is likely to lead to several new expansions in copper production, including projects by major companies like BHP and Rio Tinto. This lowering of tax will incentivise domestic production in Chile, a Tier one copper producer. However, 8Mt of additional copper production is required by 2030 to cater to demand from renewables, power infrastructure and EVs. This equates to roughly eight times that of the world’s largest copper mine Escondida, also based in Chile.

Goldman Sachs analysts speculate that in order to reach the production required, a new marginal incentive price of US$9000/t copper is necessary for a new mine today. This marginal incentive is up 30% since 2018.

Moreover, Goldman predicts that 50% of copper supply from development ready projects will come from unconventional jurisdictions like the Democratic Republic of the Congo, PNG, Botswana, Panama, Zambia, and Mongolia. These projects have higher reserve grades but face challenges due to difficult permitting regimes, government corruption and a lack of mining expertise, leading to possible delays in project execution. These geopolitical factors will play a role in the copper price, should any unforeseen events occur within these oncoming project jurisdictions, potentially restricting supply.

Globally, copper is beginning to take centre stage in several jurisdictions, as Governments battle with plans to achieve net zero emissions. In Europe, the proposed critical raw materials act tabled in March of this year outlines a path on how the EU block can navigate the ever-evolving issues surrounding supply chains of critical materials.

In this proposed act copper is identified amongst others as being essential to the EU in achieving its ‘Green Deal’ flagship program, which aims to attain net zero by 2050. Copper has been included due to its crucial role in achieving the energy transition, electromobility and sustainability. Elsewhere, other nations have also taken similar proactive measures which highlight the importance of copper.

The Australian Government has committed to an investment of $24.9 billion over this decade to deliver climate change and energy transformation priorities, including transforming Australia’s electricity supply to run mainly on renewables, supporting the development of new, clean energy industries, and supporting the decarbonization of existing industries and transport networks. Australia has too recognized copper’s critical role in enabling decarbonization.

In addition, the South Australian Government aims to further create shared value from its copper resources while driving the global clean energy and technology transformation. The state has unveiled its copper strategy in which an annual target of 1 million tonnes is to be produced sustainably by 2030.

So, with a bullish outlook, a turbulent market with contrasting forecasts and a global drive for net zero, where does the value lie for the investor?  The Australian copper industry is alive and well with a tranche of new explorers aiming to emanate the success of their larger counterparts. South Australia boasts vast copper resources, world-class copper-gold mines, and advanced projects, which positions the jurisdiction as a stable, secure, and green destination for investments along the copper value chain. South Australia is prime real estate on the continent for the elusive red commodity, with favourable Governmental policies at play, a flurry of activity has been observed of late.

Recently, BHP [BHP-ASX] have acquired Prominent Hill and Carrapateena mines from OZ Minerals, a move which has seen a combined 20,000 tonnes production across two months for the giant since its acquisition. Additionally, the giant has seen its Olympic Dam operation increase copper production some 54% in FY23 (212,000t) compared to FY22 haul (138,000t).

Also, landholding within the copper rich south is Copper Search [CUS-ASX]. Operating at the Peake project, the team aims to identify similar style and scale potential of the recent BHP acquired Prominent Hill and Carrapateena Iron-Ore-Copper-Gold (IOCG) deposits. The team at Copper Seach have commenced a four-hole diamond program which has already uncovered a shallow IOCG style mineralizing system, prolific of the area.

Elsewhere in the region, Hillgrove Resources [HGO-ASX] has made a Final Investment Decision (FID) to proceed with the stage one development of the Kanmantoo underground copper mine. Located in the Adelaide Hills region, the project is expected to deliver 43,500 tonnes of copper in concentrate over a four-year schedule. The stage one mine plan focuses on two of the nine known mineral lodes, with drilling underway to expand mine life and annual copper.

Lastly, looking ahead, copper is expected to face potential supply shortages by the end of the decade as miners encounter hurdles to bring new supplies online. With an additional 8Mt required by 2030, investors should be poised to navigate through the ever-changing market landscape as the fate of copper hinges on the interplay of global economic conditions, green initiatives, and an evolving demand landscape, making it a pivotal year for the red metal and those seeking to harness its potential.