Copper Price Bullish Outlook Supported By Underinvestment

Analyst says the copper price needs to be well above $3 per pound for new investments to occur

Rijuta Dey Bera | January 27, 2020 | SmallCapPower: In the 2000s, increased demand for copper due to a rapid expansion in China’s economy – at a rate of up to 14% per year in 2005 – bolstered copper prices, according to the World Bank.

(The following is an excerpt from an article originally published on metalbulletin.com on January 14, 2020)

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In the middle of that decade, the LME three-month official copper prices surged to a high of $10,124 per tonne in mid-February 2011 from a low of $1,340.50 per tonne in early November 2001, according to Fastmarkets’ price archives.

This supercycle prompted a flurry of capital expenditure activity from 2012-13, with $12-13 billion invested in new copper supply sources. This was partly responsible for sending copper prices down since then, according to Stephen Gill, managing partner at Zug, Switzerland-based Pala Investments.

The end of the supercycle had a “massive” impact on mining companies, according to Juan Carlos Guajardo, founder and executive director of Chilean mining consultancy Plusmining.

“While the supercycle brought an enthusiastic growth in investments, the downward [price] trend since 2012 has constrained the financial position of the companies which are struggling to control debt and regain shareholders confidence, therefore making it difficult to focus on growth,” Guajardo told Fastmarkets.

Patrick Cussen, who heads up Chilean consultancy Celta and was formerly managing director of Chile Copper Ltd, noted that current supply risks “are not major,” although declining grades of mined copper ore could fuel a potential shortage of the red metal.

For example, Codelco produced 1.68 million tonnes of refined copper in 2018, down from 1.73 million tonnes in 2017, reflecting the decreased copper content in mined ore.

Copper needs to be “well above” $3 per lb to attract investments

“Important investments won’t happen at $2.60 per lb,” Cussen said. “The copper price needs to be well above $3 ($6,614 per tonne) for new investments to occur.”

Pala Investments’ Gill agreed. “Either the world demand for copper [will need to] shrink substantially or the incentive price of $7,800-8,000 per tonne [$3.53-$3.63 per lb will need to be] reached,” Gill told Fastmarkets.

Pala Investments is a majority shareholder of U.S. copper miner Nevada Copper Corp. (TSX:NCU), whose Pumpkin Hollow project is the first U.S. copper mine to commence production in the past decade.

About $8-10 billion in sustained annual capital expenditures are required “just to maintain current copper mine output,” Gill said.

The capital cost for bringing new copper supply online is around $18,000 per tonne, he added, so if 5-6 million tonnes of additional output is required over the next five to seven years to meet the world’s growing copper usage, investments in the industry need to total about $12-17 billion annually.

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