Follow the money – BHP is spending $US2.5 billion to expand the life of its Spence mine in Chile, as well as another $US600 million on revitalising Olympic Dam in South Australia. OZ Minerals will spend well over $US1 billion expanding its Prominent Hill mine and developing a new mine at Carrapateena in South Australia.
On top of that, production at Escondida in Chile, the world’s biggest copper mine, is picking up after the strike earlier this year, with the mine’s owners (BHP and Rio) poised to benefit from a $US3.8 billion expansion of the mine.
Glencore is set to bring its Katanga project in the Democratic Republic of Congo back online in next year. In addition, Freeport has just reached an agreement with the government of Indonesia to keep operating its giant Grasberg mine (which will see the Indonesia government take a majority stake in the mine in the near future at an as yet undetermined price).
The common denominator – the rising price of copper and future demand supply scenarios, most of which seem to be bullish, as well the expected surge in production of electric vehicles – either driverless or replacements for existing driven combustion engine vehicles.
In fact copper prices have climbed 24% so far this year,(20% since May alone) while gold has gained 15% and silver, 11%. Aluminium, lead, zinc and nickel rices have all risen sharply since mid year (a bit like what happened in 2016). Iron ore prices are up 25% in the last two months.
Commodities (except for oil and gas) are running.
Even coal has not lost all the Cyclone Debbie generated gains. Coking coal pries have regained the $US200 a tonne this week and steaming coal prices have topped $US96 a tonne – both are a long way from the $US300 a tonne and $US125a tonne they flirted with in April after Debbie. But equally both are well up from the $US160 and $US70 a tonne they then fell back to a month later.
Analysts say the big drivers have been upbeat economic readings from China, the world’s biggest consumer of commodities, as well as rising confidence in the global economy. The US dollar’s slump has helped a lot, too, making dollar-denominated metals cheaper for foreign buyers. And of the lot, copper has been attracting much of the attention. It is likely LME copper prices will top the $US10,000 a tonne mark in the next couple of weeks for the first time in three years.
Add to this the lure of the electric car (it’s not just lithium that is hot). The price of cobalt has soared this year and palladium prices jumped sharply to 16 year highs last week.
In the past week hedge funds increased their net long position in Comex copper — the difference between punts on rising and falling prices — to a record 125,000 contacts.
Copper for delivery in three months on the London Metal Exchange is currently trading $US6,903 a tonne – around $US1,000 above where analysts expect it to trade at the end of the year, according to consensus forecasts compiled by Bloomberg.
Shares in Glencore and Freeport-McMoRan, the world’s biggest publicly listed copper producer, have both risen 30% over the past three months. While some analysts have started to nudge up their estimates, most believe the price has gone too far, too fast and that copper, used extensively in household wiring, will come under pressure.
They say there are still plentiful supplies of copper and that the market has overreacted to China’s partial ban on scrap imports and a flurry of minor supply disruptions.
Some also think the US dollar, which has fallen almost 5% against a basket of currencies since the end of May, could recover on the back of strong economic data. The fall has been despite the rise in tensions around North Korea.
Chinese imports have been weak all year until June when they picked up. Friday’s August trade data will tell us if the small recovery has been sustained.
Investment bank UBS reckons battery-powered vehicles will drive 1.2 million tonnes per annum of incremental copper demand by 2025 — or 5% of forecast consumption for that year — just as supplies start to peak.
“Our forecasts assume the current suite of visible mine supply and projects in development see copper supply peak in the early 2020s. After that time, we see grade decline drive a 1 to 2 per cent fall per annum in mine supply. We conclude many copper projects are likely to be needed to fill this gap,” wrote analysts at UBS in a recent report.
