By Kaynat Chainwala
Copper, known as the red metal, heated up significantly this year due to a squeeze in the supply of mined ore alongside flourishing demand from Artificial Intelligence (AI) and green energy markets, which fuelled bets on looming shortages. So far this year, LME Copper has rallied more than 18 percent and currently trades near its highest levels in 2 years, while MCX Copper is up nearly 20 percent, rapidly approaching record high levels.
Recently, LME Copper breached $10,000 per tonne for the first time since April 2022, as BHP’s unsolicited all-share takeover proposal for rival Anglo American, aiming to create the world’s largest copper miner, raised speculation that the world’s mines are not fully prepared to meet emerging demand from the global energy transition.
According to CRU Group, production from existing mines is set to fall sharply in the coming years, and miners would need to spend more than $150 billion between 2025 and 2032 to fulfil the industry’s supply needs. Currently, copper is trading above $10,000 per tonne, and considering current factors, prospects of the metal hitting its all-time high of $10,845 per tonne cannot be ruled out in the medium term.
Why are copper prices rising?
A steep decline in treatment and refining charges (TCs/RCs) drew market attention to the tightness in concentrate markets. The exceptionally low copper concentrate charges, reportedly the lowest in at least a decade, can primarily be attributed to supply setbacks at global mines and the rapid expansion of copper smelting capacity. The closure of First Quantum’s Cobre Panama mine, which contributes to 1.5 percent of global copper supply, and Anglo American cutting its 2024 output guidance in December 2023 were the initial triggers for the supply shocks.
China's Copper Smelters Purchase Team (CSPT), a group of top copper smelters accounting for around 76 percent of China’s copper smelter output, had previously set first-quarter guidance of $80 per tonne and 8.0 cents per pound, the same level agreed upon between Chilean miner Antofagasta and China’s Jinchuan Group in November 2023 for their 2024 contracts.
The decline in TC/RCs accelerated in March, with copper concentrate collapsing to levels more than 90 percent lower in the spot market than six months ago. According to Bloomberg reports, cargoes of copper concentrate from BHP Group Ltd’s giant Escondida mine in Chile changed hands in March at terms as low as $12 a metric tonne and 1.2 cents a pound to Chinese smelters, and at $3 and 0.3 cents to at least one trader, according to people familiar with the deals.
Near-zero processing fees prompted China’s top smelters to reach an agreement to lower operation rates, adjust maintenance plans, and postpone new projects. At the quarterly meeting of the Copper Smelters Purchasing Team, thirteen major smelters proposed a reduction of 5 percent to 10 percent in planned output this year.
Soaring demand
Chilean miner Antofagasta expects the refined copper market to be in a deficit of 200,000-300,000 tonne in 2024, taking into consideration improving demand and revisions to production seen toward the end of 2023. Meanwhile, soaring demand for the metal in electric vehicles, solar panels, and AI technologies is boosting the consumption outlook.
Copper gains accelerated in April on signs that Chinese smelters are actually complying with pledges to cut output by 5-10 percent in the face of tighter-than-expected concentrate supply and overcapacity. The latest data from high-frequency data provider Earthi Global Copper Monitoring Index shows smelter inactivity in China rose to an average of 8.5 percent, compared with 4.1 percent in the first quarter of 2023 and 4 percent in the same quarter the year before.
The writer is Senior Manager-Commodity Research at Kotak Securities
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