International copper prices have surged by over 40 percent to $6,500 per tonne in the last four months due to disruptions in the copper supply chain by the ongoing COVID-19 pandemic, especially in the form of lower mine output, according to a report.
After a three-year low of $4,600 per tonne in March 2020, there has been a recovery in prices, the current price level of $6,500 per tonne is the highest in the last 16 months, ICRA Ratings said in a report.
The increase in prices is a result of disruptions in the copper supply chain, especially in the form of lower mine output, it said. The mining restrictions due to the pandemic is estimated to have resulted in a sharp drop in the production of copper ore during the second quarter of this calendar year, it added.
This is progressively resulting in a shortage of the finished metal in the market and the prevailing situation may continue in the near term, which is fueling metal prices upwards, the ICRA note added.
“Incidentally, the current price level of $6,500 per tonne is the highest in the last 16 months and, contrary to prevailing macro-economic sentiments, copper prices quoted at the London Metal exchange (LME) are currently up by 8 percent compared to the levels prevalent a year ago.
While the macro-economic uncertainties due to the pandemic have impacted global copper demand, resulting in a contraction in consumption by 2.5 percent in the first quarter of CY2020, the supply-side impact of the pandemic on the other hand has resulted in recovery in prices,” ICRA Senior Vice President and Group Head Jayanta Roy said.
Globally, almost 50 percent of the world's copper ore is mined in South America, primarily in Chile and Peru.
The pandemic has severely impacted mining in both these countries and production is estimated to have contracted by almost 50 percent in the second quarter of CY2020, ICRA noted.
The disruption has resulted in lower primary metal production from the beginning of June, ICRA said adding that the availability of copper ore has also been impacted by disruptions in inland logistics in Africa, another large producer of copper ore in the world.
Reduced mine output has resulted in a sharp contraction in copper treatment and refining charges (TC/RC), thereby impacting the profits of the custom smelters-cum-refiners.
The movement in TC/RC is determined by the balance between the supply of ore and the availability of smelters/refineries for conversion of the concentrated ore to finished metal. Availability of smelters/refineries has remained constant at a time when mine production has fallen sharply, thus weighing on the conversion rates.
Consequently, global copper TC/RC has corrected by over 30 per cent in the last four months, the report noted.
ICRA estimates the contribution per tonne of operating miners has increased by 80 percent in the last four months and by 13 percent compared to the levels prevalent a year ago.
In the domestic market, Hindustan Copper (HCL) is the only copper miner and Hindalco Industries (Hindalco) is currently the only operating copper smelter-cum-refiner in the country, it said.
“We expect the consumption of copper to contract significantly by 3-4 percent in the current calendar year. However, the supply side constraints may result in a similar reduction in copper production, which would keep prices elevated, going forward. While a recovery in demand is expected in CY2021, the overall situation would depend on how the pandemic situation pans out,” Roy added.Follow our full coverage of the coronavirus pandemic here.