Preparing For Copper Price Upside

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Analysts have positive views on potential upside for the copper price based on recent news out of China and longer-term fundamentals.

-Copper prices at the beginning of an upside run, according to market analysts
-Chinese smelter agreement a key supply side catalyst, says UBS
-Underlying copper market fundamentals are also positive
-Copper price forecasts and stock picks

By Mark Woodruff

Copper’s bull run is only just beginning, according to ING Bank, despite lingering short-term demand concerns, after prices recently rallied to one-year highs as major smelters in China pledged to control capacity after a collapse in treatment and refining charges.

UBS also envisages a protracted period of supply constraint, resulting in material and sustained copper price upside, while Macquarie last week raised its copper price forecasts due to supply shortages against a relatively robust demand backdrop.

In a rare agreement among Chinese copper smelters, production will be jointly cut (according to recent media reports) to cope with shortages of raw material. UBS had previously noted such a move would be a key supply-side catalyst to trigger a break to the upside for the copper price.

While this broker acknowledges views are mixed on what a sharp decline in Chinese treatment and refining charges means for the copper price, the speed and magnitude of the decline likely reflects disruption to mine supply and depletion of concentrate inventory, resulting in panic buying in the spot market.

Spot prices for treatment and refining are now at record lows, down more than -80% since the beginning of the year.

As smelter capacity additions have been in the pipeline for a long time, UBS believes they are a less likely cause of the fall in charges.

Should overcapacity in smelting be the reason for these lower treatment charges, the analysts note the outcome wouldn’t necessarily be bullish for the copper price.

If enough copper units (concentrate and scrap) are available, capacity additions would typically result in a lift in total refined output, explains UBS.

Prior to the Chinese smelter news

Prior to the news on treatment and refining charges, UBS had been pivoting towards a more constructive view on copper, in the belief the market was closer to a fundamental inflection point.

Earlier in March, the broker noted material downgrades to 2024 mine production guidance since the beginning of the year. While this suggested limited supply growth, copper price upside had been capped by weak physical markets due to strong refined output and lacklustre demand.

These conditions had created a buying opportunity, according to the analysts, given the (now correct) expectation refined supply would come under pressure in the near-term due to shortages of concentrate, and because traditional drivers of copper demand would improve, supported by restocking.

Back in late-February, ANZ Bank also expected an inflection point in central bank monetary policies would trigger a broader near-term improvement in sentiment for copper.

The bank then forecast the beginning of an interest rate easing cycle in the third quarter of 2024 would create tailwinds for commodity markets in the second half of the year.

Moreover, ANZ suggested unplanned disruptions in supply would likely remain high as producers struggle with high costs and falling quality issues. Ongoing political risks were also considered high, putting new mine development at risk.

Despite the economic backdrop casting a shadow over base metals markets, the bank highlighted underlying fundamental indicators were indicating copper’s physical market was not seeing any weakness.

The big picture for copper

Copper is one of the most important base metals, in ANZ Bank’s view, because of its use in many sectors.

The bank highlighted figures from the Copper Development Association showing the construction sector consumes around 46% of all copper, while 21% goes into the electrical industry and about 16% into transportation. The remaining 17% is used in consumer products and industrial machinery and equipment.

Demand for copper will be further helped by an acceleration in the energy transition, noted ANZ, with annual installed photovoltaic capacity reaching a record high in 2023.

China’s power industry is also important for copper as it consumes around a third of the country’s supply.

Copper is very ductile and a good conductor of electricity and heat, making it an excellent material for wiring, electrical cabling and electrical generators.

Despite growth slowing for electric vehicles (EVs) globally, sales are still headed for another record year in 2024, and the bank noted increasing usage will drive copper demand higher.

ING Bank also highlights copper is used in everything from EVs to wind turbines and power grids.

The metal is a key component used in electric motors, batteries and wiring, as well as charging stations.

Importantly, copper has no substitute for its use in EVs, wind and solar energy, highlights ING, and its appeal to investors as a key green metal should support higher prices over the next few years.

Last year's rising demand for renewables and EVs in China has already offset the slump from the more traditional sectors such as the property market, and the bank anticipates this shift in demand drivers will continue in 2024.

ING also believes an improvement in the ailing property sector in China will be key in supporting copper’s next move higher.

Forecasts 

ING points out microeconomic dynamics are starting to look more constructive for copper amid a tightening supply outlook, while the demand is expected to slowly improve in 2024, especially via the green energy sector.

For the short term, the bank suggests upside to copper prices might be capped by macroeconomic drivers, including ongoing demand concerns in China and lingering uncertainty over US monetary policy.

Copper prices will rise to US$8,700/t in the second quarter of 2024 (seasonally the strongest quarter for copper demand) from US$8,400/t in the first quarter, forecasts ING. 

While prices will peak in the fourth quarter at US$9,000/t, according to the bank, they are expected to remain volatile as the market continues to respond to macroeconomic drivers, including the pathway for US interest rates and Chinese policies.

UBS predicts a meaningful deficit in 2024 of more than 300,000 tonnes, driven by a sharp slowdown in supply, which will more than offset the expected deceleration in global copper demand growth.

The probability is low for a strong rebound in mine supply of more than 5% in 2025, according to the analysts, and if/when the market moves into deficit in the second half of 2024, tightness is likely to persist for an extended period. 

Latest supply-side developments give the broker conviction physical tightness will emerge when demand recovers.

UBS forecasts a US$4.50/lb (around US$9,900/t) copper price in 2025 and US$4.75/lb (circa US$10,500/t) in 2026.

A pick-up in demand will be needed to tighten a currently weak physical market. Rate cuts triggering restocking in Europe/US and a recovery in Chinese exports are the key to drive an improvement in demand from 'traditional' end uses, explains the broker.

More supportive macroeconomic data out of China, interest rate easing by the Federal Reserve and US dollar weakness would also drive positive investor momentum, in the analysts' opinion.

ANZ Bank’s short-term target for copper (forecast in late February) was US$9,000/t, with an expectation prices would lift above US$10,000/t over the ensuing year.

Just last week, Macquarie increased its 2024 and 2025 forecasts for copper by 11% and 4%, respectively, driven by supply shortages against a relatively robust demand backdrop. The long-term price estimate was also increased by 1% to US$8400/t.

For 2024, Macquarie notes its forecast of US$4.09/lb is 4% higher than the consensus estimate.

Stock picks

Outperform-rated Sandfire Resources ((SFR)) is Macquarie’s key copper producer pick with the Motheo operations in Botswana ramping-up on time and on budget and expected to reach 5.2Mtpa capacity in the first half of this year.

The company has a strong organic growth pipeline, notes the analyst, with copper production increasing to around 107kt in FY25 from 84kt. UBS also has a Buy rating for Sandfire Resources ((SFR)).

From among Ord Minnett’s research coverage of resources, Sandfire Resources and (for copper/gold) Evolution Mining ((EVN)) are preferred exposures on a near-term view, while AIC Mines ((A1M)) and Aurelia Metals ((AMI)) are seen as representing the best copper/gold opportunities in the medium-term.

This broker points to a valuation disconnect between current equity trading for copper companies on the ASX and recent transactions multiples. It's thought investors will benefit as the disconnect unwinds and the appetite for small cap exposures improves.

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