Copper falls from record highs but remains hot

"We are not in the copper supercycle camp and did not believe the price rally to record levels in May was sustainable because we do not see a dramatic shift in the supply and demand over the next two-to-three years to justify price gains," analysts at UBS said September 10.The "thematics" of energy transition and challenges bringing on new mine supply have been around "for some time", UBS noted."China demand signals were weak and in our view the ‘reflation trade' was the primary driver of price gains," it said.The energy transition is coming at a time of a waning pace in China's industrialization—which has been the dominant driver of demand growth for copper over the past two decades. While the demand growth caused by the former is offsetting the decrease of the latter, it does not require an unprecedented pace of supply expansion, investment bank Macquarie said September 30 in its annual Commodities Compendium.Prices will, however, need to incentivise new supply."The current weakness in the Chinese property sector and slowdown in goods demand is a concern, although solar capacity installations and EVs are both running ahead of our prior forecasts for this year despite continued production disruptions in the auto sector."In absolute terms, the requirement of [roughly] 3Mtpa in copper supply growth by 2025 does create the prospect for significant deficits if sufficient investment is not forthcoming, and we anticipate that a structurally higher trading range will need to be maintained," Macquarie said."Of more immediate (and recent) concern is the current situation with power in China, which is now extending from upstream to downstream industries," it said.In a forecast released September 30, the office of Australia's chief economist said refined copper production would grow by 4.4% this year to 25.183 million tonnes. Consumption, too, is forecast to rise by 4.4%, albeit to a higher level of 25.975 million tonnes.The shortfall is forecast to ease in 2022 and 2023 with the Canberra-based analysts' forecasts next year's production and consumption at 26.228 million tones and 26.502 million tonnes, respectively. For the following year, production is pegged at 27.041 million tonnes and consumption at 27.278 million tonnes."Prices are expected to remain at relatively strong levels over the remainder of 2021, supported by supply pressures," the chief economist's Resources and Energy Quarterly report said."Upside risks to this forecast include the possibility of labour disputes at the Escondida mine in Chile, which has potential to affect supply at short notice," it said, adding that further depletion of already low inventories could also provide a price spike.Macquarie called the strikes the main supply-side concern so far this year but says they have now "all but evaporated".The Australian government analysts expect closing stocks for 2021 to be down 12.7% year on year in 2021 at 1.148 million tonnes. Further declines are anticipated for 2022 and 2023 to 1.064 million tonnes and 975,000 tonnes, respectively. One million tonnes are roughly two weeks' worth of consumption.Macquarie, meantime, while forecasting the refined market to be in deficit by 125,000 tonnes this year, expects that demand has peaked and tips prices to retreat to around $9,000/tonne."We are forecasting a fairly balanced market in 2022, before moving into surpluses of both concentrate and refined metal in 2023 and 2024," it said.Following that, though, Macquarie expects that strong demand and the "inevitable decline in mine output" will return the market to balance in 2025, before resulting in a structural deficit from 2026. For that year, it has refined production forecast at 27.54 million tonnes against consumption of 28.119 million tonnes."There is more than enough copper in the project pipeline to meet the required demand growth in 2026, but how much of this is approved in the next few years will determine the size of this hypothetical supply gap, or whether it continues to be pushed out as more supply comes online."Our forecasts indicate this supply gap could reach 5Mt by 2030," it said.The Minerals Council of Australia expects that global demand for refined copper will reach 31.1 million tonnes by 2030, up from 23.5 million tonnes in 2019. MRC says Australia, which is second in the world for copper resources, needs more greenfield exploration as there are not enough mines under development globally to meet growing demand.

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