(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
The global refined copper market will be roughly balanced between supply and demand this year before moving into significant supply surplus in 2022.
That’s the headline forecast from the International Copper Study Group (ICSG), which has just updated its twice-yearly assessment of the market’s statistical landscape.
This year’s small supply deficit of 42,000 tonnes will be dwarfed by an estimated 328,000-tonne surplus in 2022 largely on the back of a significant recovery in mine production.
That fits with a broad consensus among analysts that after several years of stagnation global mine production will start growing again.
Since this is expected to coincide with a deceleration in demand growth, particularly in China, there is no shortage of calls for copper to relinquish its lofty heights above $9,000 per tonne, for a time at least.
But copper supply has a habit of not performing to expectations, and not everyone is convinced.
Goldman Sachs is sticking with its super-bull call for London Metal Exchange (LME) copper to hit $10,500 per tonne by the end of this year.
Everything, Goldman argues, depends on when the wall of mine supply actually arrives.
Global copper mine production has largely flat-lined in recent years, notching up marginal growth of just 0.3% in 2020, according to the ICSG.
That is forecast to accelerate to 2.1% this year and to 3.9% in 2022 thanks to a spurt of new mine projects.
Only two major copper mines have entered production in the last four years, the Group notes, but five major projects will arrive by the end of next year – Kamoa Kakula in the Democratic Republic of Congo, Quellaveco in Peru, Spence-SGO and Quebrada Blanca QB2 in Chile and Udokan in Russia.
Coupled with increased production from scrap, this mine surge should feed through into a similar-sized lift in refined copper production, outpacing demand growth next year.
It’s worth noting, however, that the ICSG has lowered its 2021 mine production forecast from its last meeting in April, when it expected growth of 3.5%.
Although new capacity has started ramping up, growth has been restricted by “a slower than expected recovery in Peruvian output, reduced SX-EW (solvent extraction-electrowinning) production in Chile, the temporary closure of SX-EW mines in Myanmar as well as lower head grades and operational issues at some mines”, the ICSG said.
Some of this year’s mine supply growth has been deferred to next and it’s quite possible that some of 2022’s will be pushed back, particularly if new projects have teething problems.
And timing could be critical.
Goldman forecasts most of the new supply isn’t going to hit the refined metal market until the second half of next year.
Three consecutive quarters of what it calls “supply stagnation” before then will not be enough to prevent visible stocks falling to record lows by the end of this year.
The research note, published on Oct. 8, is titled “Pricing to Scarcity” and Goldman not only maintains its high outright price forecasts but suggests going long LME time-spreads as “a kicker”.
Goldman is increasingly a stand-out but it is right that stocks, or at least visible stocks, are low and in danger of falling much lower.
Shanghai Futures Exchange inventory hit a multi-year trough of 43,525 tonnes at the end of September with only a small post-holiday bounce to 50,062.
The local market seems extraordinarily tight despite the continuing sales of state reserve copper. A fourth auction last weekend brings total sales to 110,000 tonnes with more auctions expected.
LME inventory is much higher at 191,600 tonnes, but a spate of cancellations over the last three weeks means 70% of that metal is now awaiting physical load-out. The remaining live tonnage of 56,850 tonnes is the lowest since early March when the headline figure was itself much lower at 74,000 tonnes.
The nature of these cancellations – a near clockwork 10,000 tonnes per day since the start of the month – has raised eyebrows in the London market.
But as Goldman points out, whether this activity reflects genuine physical demand or hoarding in anticipation of higher prices, it leaves the global inventory cushion very thin.
Global visible stocks are now less than one week’s consumption, Vanessa Davidson, director of base metals at research house CRU, estimates.
CRU is looking for the copper price to trend lower through the rest of this year and next, when it is forecast to average $8,700 per tonne, but “small changes in inventory will have an exaggerated impact on price both on the upside and downside,” Davidson told Monday’s LME Week Seminar.
CRU is forecasting a refined copper surplus in 2022 of 100,000-200,000 tonnes, whereas Goldman expects a 189,000-tonne deficit.
The differing calculations explain the divergence in price call, but the statistical gap between the two is marginal in the context of a 25-million tonne global market. A small shift in either supply or demand could easily nudge the lever one way or the other.
The ICSG, which has the unenviable task of trying to make statistical sense of a complex and often opaque supply chain, always includes a cautionary caveat, recognizing that “actual market balance outcomes have on recent occasions deviated from ICSG market balance forecasts due to unforeseen developments.”
In other words, stuff happens, particularly in the copper market, which has a deserved reputation for negative supply side surprises.
Right now, though, low inventory has caught the market off guard, with the relentless cancellation activity over recent days generating a significant tightening of time-spreads.
The benchmark cash-to-three-months spread was trading in a modest backwardation of $12 per tonne at the start of this week. The cash premium closed on Tuesday at $55 and had widened to $95 on Wednesday, the most acute tightness since 2014.
Goldman Sachs’ suggested time-spread “kicker” trade looks well timed. The jury remains out on its outright price call but it is a timely reminder that future surplus isn’t much help if you need the metal now.
As LME shorts are finding to their cost.
(Editing by Alexander Smith)