Goldman Sachs November 2020
“Copper rallied on Tuesday to a seven-year peak after strong economic data from Asia as Goldman Sachs (November, 2020) said the world’s most important industrial metal was in the first leg of a bull market that could carry prices to record highs.
Benchmark copper prices on the London Metal Exchange hit $7,719 a tonne in afternoon trading, the highest level since March 2013, after readings on manufacturing activity in China and South Korea surpassed market expectations.
Copper is used in almost all construction projects and major appliances. The metal has risen 25 per cent this year, boosted by supply disruptions, hopes for a wave of “green” economic stimulus and China’s rapid recovery from the pandemic.
China, the world’s second-biggest economy, has imported a record amount of refined copper this year due to voracious commercial demand and government stockpiling.
“This current price strength is not an irrational aberration, rather we view it as the first leg of a structural bull market in copper,” said Nicholas Snowdon, analyst at Goldman Sachs.
A weaker US dollar, which makes commodities cheaper for holders of other currencies, and optimism that a vaccine will sharply slow the spread of coronavirus has lent further support. Copper slumped to $4,600 at the height of the Covid-19 crisis in March.
Its breathtaking rally has put a rocket under the share prices of major copper producers. Mr Snowdon said the 23m-tonne-a-year refined copper market was facing its tightest conditions in a decade, with demand projected to exceed supply by 327,000 tonnes next year, followed by 153,000 tonnes in 2022.
Against a backdrop of low inventories and net zero carbon pledges from countries including China, Japan and South Korea, Mr Snowdon believes significantly higher copper prices will be needed to incentivise new supply and balance the market.
“We believe it highly probable that by the second half of 2022, copper will test the existing record highs set in 2011 [$10,162],” he said. “Higher prices should ultimately help defer peak supply and ease market tightness, but this first requires a sustained rally through 2021-22.”
For an increasing number of investors copper is emerging as one of the best ways to gain exposure to a rollout of more wind, solar, batteries and electric cars, owing to the metal’s use in electric wiring.
On average, an electric car contains more than three times as much copper as an internal combustion car. Copper is also used in wind turbines and to connect renewable sources of generation to the grid.
In a recent report, investment bank Jefferies estimated cumulative copper demand from wind, solar and EV’s over the next 10 years could equal more than half of global demand in 2020 even in a “bear” case scenario.
At the same time, large high-grade copper deposits in mining-friendly jurisdictions are becoming more difficult to find. According to S&P Global Markets there has been only one major copper discovery since 2015. New copper projects also take at least seven to 10 years to develop.
Jefferies analyst Christopher LaFemina said: “The bottom line is that the mechanism to balance the copper market over the next five-plus years will need to be a higher price leading to substitution, demand destruction and more scrap supply as an adequate mine supply response will take too long to materialise.”