Broken pipeline: Is the world heading for a copper shortage?
Low copper prices have led to big cuts in exploration and development, but what does the next phase of the cycle look like? Elly Earls finds out.
New research has found that out of 80 projects in the copper pipeline, only six will be completed by 2020. Meanwhile, one major copper producer is predicting a deficit by 2018. If their forecasts play out, the copper industry is set for a sharp spike in pricing before five years is out, a scenario that’s less than favourable for the host of industries that rely on the red metal.
Recent research by CRU Group has found that only six major construction projects to build new mines or expand existing ones will be completed by 2020, with two of those at risk of being further delayed. That is out of a total of 80 planned developments worldwide, according to Bloomberg Intelligence, and is in-line with major operators’ predictions of a copper shortage towards the end of the decade.
Chile’s top copper producer, state-owned Codelco, for example, thinks demand will outstrip supply by 2018, while BHP Billiton, the operator of the world’s biggest copper mine, sees a deficit materialising from 2019.
This would be in stark contrast to where the industry is today; global production has exceeded demand in five of the past six years, largely due to slower growth in China, leading to the red metal falling more than 50% on the London Metal Exchange (LME) between 2011 to early this year. It’s currently sitting at around $4,700 per metric tonne.
Yet none of this has come as a surprise to analysts. “There are a number of reasons [for the disruption in copper project development around the world] but price is certainly one of the most important,” says Maritza Araneda, partner at KPMG’s Chile firm and commodity lead for copper. “Lower copper prices (or projections thereof) mean that projects have a lower rate of return and therefore become less economical and riskier.
“Copper prices are sensitive to shifts in the global economic outlook and in times of economic uncertainty, miners will usually focus on cost-cutting and productivity at existing operations as opposed to looking to development projects to drive production growth,” Araneda adds. “In an effort to manage cashflows, exploration and capital expenditure is quickly cut or deferred, which is what we have seen happen with development projects.”
John Mothersole, research director for the IHS Markit’s pricing and purchasing service agrees: “When you’re facing an environment of soft and/or weakening prices, it naturally causes a re-evaluation on the supply side and the obvious place to cut is the exploration and development budget. It’s quite natural for the downside of a cycle.”
Figures compiled by Bloomberg Intelligence bear this out, with capital spending by 35 major producers set to shrink to about $41bn next year, down from $104bn in 2013.
When will the market hit deficit?
Neither Mothersole nor Araneda believe the market will move into deficit quite as early as 2018.
“Although the market will tighten by 2018, I believe that it won’t return to a deficit position until 2019,” Araneda states. “While copper projects in the mining pipeline have and will continue to slow, I believe that world mine production will still continue expanding over the short to medium-term. A number of large projects approved in periods of high prices, which have recently come online, are only just starting to achieve full production levels. This, coupled with expansions at existing installations has, in my view, pushed out the time when the copper market will come into balance.”
Mothersole is more bearish still, citing a number of factors, which suggest that in the near-term – i.e. two to three years – the market will remain reasonably well-positioned to meet anticipated demand levels. One of the things the team has been most surprised by is how resilient mine production has been over the last two years.
“We’ve seen some production cuts in countries like the US and Chile, and Chile is of course very important, but production has held up surprisingly well in Central Africa, and Peruvian production has continued to expand fairly strongly. From our perspective, that’s been a surprise,” he notes, adding that demand growth from China is not going to be as strong, and therefore will not place as much pressure on commodity markets, as it did over the so-called ‘super cycle’ between 2004-2008.
Overall, IHS Markit’s market balance calculations show a market that looks to be in surplus until 2018 and, following that, secondary copper recovery could help offset any developing tightness in the market, at least to an extent. “It’s not a perfect substitute and it hasn’t prevented sharp price spikes in the past, but it could provide something of a bridge for a year or two, which makes even the period from 2018 to 2019 less risky in terms of an upside spike in pricing,” he explains.
Nonetheless, copper prices are set to rise, with IHS’s long-term forecast showing that over a ten-year horizon, they will go back up to around $6,500 per metric tonne. “Of course, the actual price will oscillate around this trend projection and we could potentially face a price spike during a period of tightness, where prices could go as high as $9,000 or $10,000 per metric tonne,” he notes.
Clearly, this would have a big impact on both miners and industries that rely heavily on copper, as Araneda explains: “From a mining industry perspective, it will incentivise miners to change their mindset from a cost-cutting one, which has marked the past few years, to one of growth and expansion. And in a deficit scenario, the incentive to ramp-up production will certainly be there,” she says, adding that as the past two years have been painful for the industry, those that have been able to ride out the storm will be well placed to capitalise on the sector’s recovery.
The picture won’t be so rosy for the host of industries in which copper is used intensively, however. “Given copper’s use is widespread, those industries that rely on the steady supply of copper will either need to find alternate substitutes (such as the use of aluminium in the power sector in China) or be savvy about locking in long-term pricing arrangements,” Araneda advises.