ERG’s Frontier copper mining and processing facility

2021 is shaping up to be a year of significant deficit in the copper market as tighter-than-expected supply struggles to keep up with a radically improved demand outlook, underpinned by unprecedented levels of ‘green’ stimulus.

We expect copper demand growth outside of China to be a key driving force this year. The global industrial recovery is picking up pace, with macro indicators across several key copper consuming nations showing strength. Recent manufacturing PMI readings in the US, Europe, Japan, South Korea and India have entered expansionary territory.

AUTHOR: Benedikt Sobotka, CEO of Eurasian Resources Group

The approval of the USD 1.9bn stimulus package in the US, as well as green stimulus measures across the EU countries, will also provide a boost to copper demand, effectively bringing forward the green energy boom by several years.

Overall, we see the current period as the preamble to a prolonged phase of above-average copper consumption growth, especially in Europe and the US, where demand has been broadly stagnant over the past decade.

In China, the strong recovery from the coronavirus pandemic is set to continue this year. The world’s largest consumer of copper has recently unveiled its 14th Five-Year Plan, which is highly supportive to copper demand. In particular, the Plan’s focus on rural revitalisation, decarbonisation and pledges to advance infrastructure construction, transportation, power, green energy, digital development and technological innovation are set to underpin strong copper demand growth.

Moreover, under China’s ‘dual circulation’ strategy, copper-intensive investment-led growth will remain a priority, as Chinese manufacturers extend their supply chains upstream domestically.

Meanwhile, aside from its immediate disruption to mine production throughout 2020, COVID-19 will leave a lasting legacy on mine supply. As producers were forced to reduce CAPEX, push back maintenance and suspend project development, we estimate that the pool of potential production from mine projects has shrunk significantly during the past year.

These developments prompted many mining companies to rethink their global supply networks, create alternate supply lines and re-evaluate their inventory strategies. At ERG, we were quick to safeguard our supply chains and implement an extensive business continuity plan, which allowed us to endure the coronavirus-induced downturn and ride a wave of recovery, unlike many of our peers.

Our Metalkol RTR operation in the DRC – one of the largest copper reprocessing plants globally – will continue to supply customers in this fast-growing market in 2021 and beyond.

Evidence of constrained mine supply is most apparent in the copper concentrates market, where TC/RCs have slumped to near 10-year lows. Constrained mine supply has been compounded by shipping delays, especially from Chile, as well as China’s unofficial ban on Australian concentrate imports.

Overall, we expect the tightness in concentrate supply to prevail throughout 2021, which is likely to delay new smelting capacity construction in China, leaving the country more dependent on imports of copper cathodes, such as those produced at Metalkol RTR.

Moreover, we expect scrap supply to undershoot market expectations. While, historically, we have observed a strong positive relationship between copper prices and scrap supply, the recovery in scrap supply has thus far been very modest. In part, we attribute this to the continuing effects of coronavirus-related lockdown restrictions and logistical bottlenecks.

Moreover, China’s recent changes to scrap import regulations have disrupted global scrap flows, squeezing availability: we believe that it will be many more years before the market adjusts to these new realities. Perhaps most importantly, however, the entire scrap supply chain has become much more consolidated and lean over the past decade, with vastly diminished inventories of ‘old’ scrap: scrap copper obtained from products that have ended their useful life.

All in all, we believe that a return to five-digit (integral) copper prices is not only justified, but also a likely near-term reality.