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BHP Commentary and Outlook for Copper

Metal News - Published on Thu, 20 Feb 2020

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BHP said tat “Copper prices ranged from $5537/t to $6211/t ($2.51/lb to $2.82/lb) over the first half of the 2020 financial year, averaging $5841/t ($2.65/lb).11 The price range and the average were around –5 per cent lower than in the prior half. Price trends have been heavily influenced by the whip–sawing of expectations with respect to the US–China trade confrontation. The sentiment impact from Covid–19 has weighed heavily on prices in the early part of calendar 2020. In the absence of Covid–19, we assess that the forward looking fundamentals for copper would support an approximate trading range of $6000/t to $6500/t, based on an average rate of disruption to primary supply (i.e. an outcome closer to the historical 5 per cent loss, higher than the last two years). As matters stand, a return to that fundamental range is expected to require demonstrable containment of Covid–19.”

In contrast to steel, Chinese end–use demand for copper was weaker than expected in calendar year 2019. Dwelling completions12 declined for much of the period, the auto sector has remained weak, electronics have been mixed (weak early in the calendar year and then gaining momentum late) while investment in the power grid fell behind budget early in the year and never came close to catching up.13 Partially offsetting those disappointments, machinery was more resilient than expected early in the calendar year (ahead of a second half decline that we did anticipate) and household appliances have been solid. The net result is that demand grew by less than 1 per cent in calendar 2019. For calendar 2020, our Chinese refined copper forecast of around 1½ per cent comes with the same caveat as steel and steel–making raw materials regarding Covid–19: if end–use activity has not returned to normal in April, we expect to revise our forecasts downwards.

By end use sector, our baseline outlook for calendar year 2020 comprises a positive view on housing completions, which are set for healthy growth after a multi–year downtrend. Electronics are expected to continue on an improving trend, while autos will stage a modest recovery. Investment in power infrastructure, though, is expected to be flat or lower in calendar 2020, with central efforts to instil capital discipline in grid expenditure expected to limit the scale and number of new projects approved.14 Consumer durables are expected to slow, with demand for air conditioners due for a pause after a frenetic increase over the last few years.

Demand from the rest of the world also disappointed in calendar year 2019. Within that overall judgement the United States was the most resilient performer among the major regions. Private housing starts have rebounded from around 1.2 million annualised at the time of our full–year 2019 financial results to a 13 year high of more than 1.6 million in December 2019. Private housing completions were tracking at a solid 1.277 million in the same month. On the other hand, forward looking indicators of business investment, such as new capital goods orders, have been pointing towards weaker outcomes. Manufacturing was softer in the second half of the calendar year than the first, with official industrial production and private sector purchasing manager indexes both describing a mild contraction in activity. Also, the inventory–to–sales ratio of manufacturers rose steadily over the last 12 months. The fact that this mixed catalogue of trends counts as outperformance tells you what you need to know about manufacturing in Developed Asia and Europe over this period.

On the global scale, upstream electronics demand growth was weak for much of the year, but it is on an improving trend as calendar 2020 opens. Global semiconductor sales bottomed in August of 2019 at –15.9 per cent YoY. The rate of contraction has since eased to –5.5% YoY. Auto sales are on track for a second year of decline at the global level in the 2019 calendar year. The weakness in autos and electronics has exerted a considerable drag on demand from developed Asia and Europe.

Turning to supply, the primary supply disruption rate for the full 2019 calendar year is expected to be between 4½ per cent and 5 per cent. The spot estimate from Wood Mackenzie for the year–to–date ahead of December quarter reporting is 4.4 per cent. Within that figure, concentrate producers are tracking at 3.3 per cent while SxEW15 operations have recorded a striking 9.2 per cent outcome. Those estimates compare to around 3½ per cent in calendar 2018. From a copper price perspective, the increased quantum of supply disruptions year–over–year has been a partial offset to the weaker than expected demand environment described above.

Treatment and refining charges (TCRCs) for copper concentrates have experienced a steady march lower (i.e. terms more favourable to the producer) in the second half of the calendar year, partly reflecting the introduction of new smelting capacity in China and partly due to a shortage of high quality, low impurity material. The FastMarkets TC index has ranged between a high of $56.7/dmt and a low of $49.2/dmt, averaging around $52/dmt.16 That compares to the 2019 benchmark settlement (in which we do not participate) of $62/dmt.17 Shanghai Grade A cathode premia were volatile, but they increased on average in the second half of the calendar year 2019.

Taking the longer historical view, a marked five year downward trend in TCRCs can be observed. We interpret this as a fundamental signal that the balance of demand for high quality concentrates, vis–à–vis their reliable and consistent supply, has been on a structurally tightening path. Supporting that observation, the steady downward trend in TCRCs has emerged at a time when the base price of copper has seen considerable two–way volatility, but without a clear directional trend for much of the period. As we move closer to the point where the copper market in aggregate moves into structural deficit (see below), it is possible that TCRCs could be lower, on average, in the coming five years than in the five years just gone.

A more transparent and liquid indexation model would assist the industry to appropriately value the wide variety of higher and lower impurity products that comprise the aggregate supply of copper concentrates.

Developments in China will continue to be vital for the copper market. Major themes include the evolution of the regulatory environment for scrap imports; the scale of investments in domestic and regional scrap processing capability; lifecycles of copper intensive capital stock; technical standards for aluminium usage in power cables; substitution trends in renewables power equipment; and the evolution of policies towards the production and uptake of electric vehicles.

Looking at the first of these questions in more detail, China’s curbs on low grade scrap imports, which have now extended to a more controlled inflow of higher grade scrap, should be positive for primary demand, for a time. But beyond an inevitable adjustment phase, we do not believe this development is likely to sustainably alter longer run market balances, the incentive to invest in scrap processing capacity globally, or mine inducement dynamics. It could, however, have an impact on the incentive for local firms to invest in scrap collection and processing capacity at home. As time goes on, we expect that customs priority will be given to even cleaner scrap, with copper–contained now possibly converging on an average of above 90 per cent, even more stringent than our prior view of 85 to 90 per cent.

Turning to the outlook for the aggregate refined copper balance, demand and supply (primary plus secondary) are expected to advance roughly in parallel for the next couple of years. Solid demand growth is expected to be matched with a combination of committed green and brownfield supply (including our Spence Growth Option, which is expected to be completed in the first half of financial year 2021) as well as rising scrap availability. Beyond that near–term window, depending upon exact project timing and year–to–year demand swings, the expected arrival of a cluster of new supply from Peru, Chile, central Africa and Mongolia in the calendar 2022 to 2024 period could temporarily tilt the market into modest surplus in one or more of those years.

Subject to the above caveats on precise timing, a structural deficit is expected to open in the mid–2020s, at which point we see some sustained upside for prices. Grade decline, resource depletion, increased input costs, water constraints and a scarcity of high–quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to balance the market.

It is these parameters that are critical for assessing where the marginal tonne of primary copper will come from in the long run and what it will cost. We estimate that grade decline could remove –2 Mt per annum of mine supply by 2030, with resource depletion potentially removing an additional –1½ and –2¼ Mt per annum by this date, depending upon the specifics of the case under consideration.

Our view is that the price setting marginal tonne a decade hence will come from either a lower grade brownfield expansion in a lower risk jurisdiction, or a higher grade greenfield in a higher risk jurisdiction. Neither source of metal is likely to come cheaply.

Our low case for the copper price is predicated on stern competition for primary supply from scrap; on–going aluminium substitution in China; low case macro assumptions that constrain traditional end–use demand; low case EV penetration [below the vast majority of published mid–cases]; 60kgs of copper intensity per EV [–20kgs from the mid]; and low case macro cost inputs [for example USD/CLP close to 700].

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Posted By : Rabi Wangkhem on Thu, 20 Feb 2020
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