Magnetite Exploration Target in Whaleshark – Amended

1. How does China affect copper demand?

China is the fourth largest copper-producing country in the world behind Chile, Peru and the Democratic Republic of Congo (DRC). However, China plays an outsized role in copper demand, accounting for about 55 percent of global consumption. Around 30 percent of China’s copper consumption is associated with its building and construction sector.

Spikes in demand from China have led to numerous jumps in copper prices over the years, while pullbacks in the second largest global economy have translated into dramatic slides in the price of the industrial metal.

For example, strong demand from China in 2020 and early 2021 pushed copper prices to record-breaking highs. However, signs of slowing demand in the second half of 2021, alongside the fiscal crisis surrounding Chinese real estate giant Evergrande (HKEX:3333), created a price environment that was marred with volatility.

Copper managed to hit a then record-high price of US$5.02 per pound in March 2022 on fears of supply chain disruptions following Russia’s invasion of Ukraine. However, softer demand from China’s real estate sector continued to weigh on the market throughout the second half of 2022 and much of 2023, placing downward pressure on copper prices. By mid-October 2023, the price of copper had dropped to a low of US$3.56 per pound.

Another way in which China shapes global copper prices is through its copper smelters. The nation leads the world in refined copper production, and has increased its refining capacity in recent years, as have India and Indonesia. In March of this year, Chinese smelters collectively cut output in the face of single-digit treatment and refining charges. Prices for the red metal jumped 3 percent on the news to reach US$4.12 per pound.

The increasing threat of a looming supply bottleneck amid rising demand for copper from the energy transition led copper to its most recent record high of US$5.20 per pound in May. Even so, China’s ongoing property sector crisis has continued to place downward pressure on copper prices alongside weak manufacturing data.

As of mid-June, the red metal was trading at around US$4.50 per pound.

2. How much copper is needed for the energy transition?

From renewable energy and storage applications to EVs and charging infrastructure, copper’s conductive properties have given it an important role in the energy transition, which is gaining steam worldwide.

During his “Catalyzing Minerals for Development” keynote presentation at this year’s Prospectors & Developers Association of Canada (PDAC) convention, Dr. Michael Stanley, mining lead for the World Bank, explained that the energy transition will completely disrupt the century-long demand pattern for metals critical for infrastructure such as copper.

“This is very important, because the world is now challenged to replace electric systems and energy systems that the last 150 years have underpinned all economic development,” he explained to the audience.

Just looking at EVs, this sector of the auto market is expected to require much more copper usage compared to internal combustion engine (ICE) vehicles. While the average ICE vehicle contains about 22 kilograms of copper, according to researchers at Wood Mackenzie, that figure increases to 40 kilograms and 55 kilograms for hybrid EVs and plug-in hybrid EVs, respectively. Fully battery-powered EVs use even more, at 80 kilograms of the red metal.

As for renewable energy technologies, the Copper Development Association pegs copper demand from solar installations at about 5.5 MT for every megawatt, while onshore and offshore wind turbines will require 3.52 MT and 9.56 MT of copper, respectively. As governments and industries strive to meet ambitious climate goals, copper demand from this sector is expected to escalate. A 2022 study from S&P Global indicates that achieving net-zero carbon emissions by 2035 would likely lead annual copper demand to nearly double to reach 50 million MT.

Unfortunately, the prospect of meeting this expected demand from the global energy transition is challenging given the vast amount of new copper mine supply that will be required. A May 2024 International Energy Forum report projects that by 2050 as many as 194 new copper mines may be needed to satisfy this growing segment of the market.

This looming supply/demand imbalance has analysts projecting massive deficits. According to McKinsey & Company, demand from energy transition technologies will push the copper supply deficit to 6.5 million MT by 2031.

3. How does mine production affect copper supply?

Mine disruptions are another important influence on copper prices.

In 2020 and 2021, the main cause for mine disruptions was the operational shutdowns resulting from the COVID-19 pandemic. Copper-mining operations in Chile, Peru and Mexico experienced the worst of it.

More typically, these disruptions are attributed to extreme weather, natural disasters, permitting or labor disputes, which have been known to halt production for weeks and months on end. BHP’s (NYSE:BHP,ASX:BHP,LSE:BHP) Escondida mine in Chile has faced labor strikes and narrowly averted strikes several times over the years. In June 2024, the mining giant warded off another potential strike at Escondida with a preliminary wage agreement, according to BNN Bloomberg. The mine’s output alone accounts for about 1 percent of global copper mine supply.

In late 2022, protests against the government in Peru’s mining-heavy regions turned deadly, and the disruptions continued into 2023. Nevertheless, Peru remained the second largest producer of copper in 2023.

Looking forward, however, Victor Gobitz, president of Peru’s biggest copper mine Antamina, told Reuters that the ongoing crisis is dissuading investments in greenfield copper projects. Antamina is a joint venture between Glencore (LSE:GLEN,OTC Pink:GLCNF), BHP, Teck (TSX:TECK.B,TSX:TECK.A,NYSE:TECK) and Mitsubishi (TSE:8058).

Another issue facing mine production is the growing significance of the DRC in global mine production, a nation fraught with instability. The DRC ranked third in global production last year and is on the verge of overtaking Peru. Unfortunately, it is plagued by political upheaval, as well as corruption and human rights abuses associated with artisanal mining.

Perhaps the biggest setback for global copper mine supply came at the end of 2023, with the forced closure of First Quantum Minerals’ (TSX:FM,OTC Pink:FQVLF) Cobre Panama copper mine in Panama. According to analysts at research firm ING, this “removed around 4,000,000 tonnes of the metal from the world’s annual supply.”

Although the government of Panama had approved a new 20 year extension to First Quantum’s mining license in October, public backlash led to protests and the Supreme Court eventually overturned the contract. Panamanian President Laurentino Cortizo ordered the Cobre Panama mine to close in November 2023.

Despite these dynamics, copper market watchers aren’t counting out the mine’s potential contribution to supply just yet. Following the May 2024 presidential elections in Panama, a new administration is set to take office in July, and First Quantum is expected to attempt to negotiate a restart. However, President-elect Jose Raul Mulino has said he will not hold talks unless the copper company drops its arbitration proceedings against Panama.

Even with these factors, global copper mine production still managed a small uptick in 2023, rising 0.46 percent over the previous year. The International Copper Study Group expects mine output in 2024 to increase by another modest 0.5 percent; however, the organization is projecting that copper production will jump by 3.9 percent in 2025.

4. How do inventory levels affect copper supply?

Rising copper inventories can weigh on the metal, while falling inventories can boost the copper price.

Declining inventories over the past few years have helped lift copper prices, with Shanghai Futures Exchange (ShFE) and LME inventories both experiencing significant drops during that time. The declines in these major stockpiles have sparked a rise in demand for scrap copper, also known as secondary copper.

So how much should investors pay attention to copper stockpiles?

Speaking to Reuters, Robin Bhar, head of metals research at Société Générale (OTC Pink:SCGLF,EPA:GLE), emphasized that it is important to look at inventories across the globe to get a better picture of the copper supply landscape. “The LME in theory is a barometer of supply and demand and looking at LME stocks you’d be pretty bullish on metals prices,” he said. “But if you look at the global picture and include ShFE and Comex, you probably want to be a bit more neutral.”

This year, copper inventories have soared, especially in China, on the back of weakening demand from the property sector and mediocre manufacturing data. According to Reuters, in the week leading up to June 7, ShFE registered copper stockpiles climbed to a 51 month high of 339,964 MT.

“Stockpiles in China usually follow a distinct seasonal patter, with strong builds at the start of the year, followed by equally rapid drawdowns from about March onwards,” notes the news agency. “However, this year is different, with ShFE warehouses continuing to see huge inflows at a time when they are normally shipping metal out.”