Copper Update - Dec 11

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“Disruptions in the copper supply chain have significantly increased, and a market deficit is now increasingly likely,” said Jefferies. “We could be at the foothills of the next copper cycle.”

By Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

Bloomberg -- A forecast surplus of copper going into 2024 has suddenly all but disappeared.

The next couple of years were supposed to be a time of
plenty for copper, thanks to a series of big new projects
starting up around the world. The expectation across most of the
industry was for a comfortable surplus before the market
tightens again later this decade, when surging demand for
electric vehicles and renewable energy infrastructure is
expected to collide with a lack of new mines.

Instead the mining industry has highlighted how vulnerable
supply can be — whether due to political and social opposition,
the difficulty of developing new operations, or simply the day-
to-day challenge of pulling rocks up from deep beneath the
earth.

In the past two weeks, one of the world’s biggest copper
mines was ordered to close in the face of fierce public
protests, while a slew of operational setbacks has forced one of
the leading miners to slash its production forecasts.

The sudden removal of around 600,000 tons of expected
supply would move the market from a large expected surplus into
balance, or even a deficit, analysts say. And it’s also a major
warning for the future: copper is an essential metal needed to
decarbonize the global economy, which means mining companies
will play a key role in facilitating the shift to green energy.

While the price reaction to the supply disruptions has so
far been muted — amidst ongoing worries about China’s property
sector — any sign of demand recovery would hit a tight market.

Last week, Panama’s government formally ordered First
Quantum Minerals Ltd. to end all operations at its $10 billion
copper mine in the country. The order followed weeks of protests
and political wrangling that came to a head when the country’s
Supreme Court invalidated the law that underpinned its mining
license. The giant Cobre Panama can produce about 400,000 tons
of copper a year.

As the market was digesting the news that one of the
biggest mines was closing (at least for now), Anglo American Plc
delivered its own production bombshell on Friday with the
announcement that it will slash production from its flagship
copper business in South America.

While problems at its platinum and iron ore mines in South
Africa were well publicized, the copper cuts caught investors
off guard, sending the company’s shares plunging by 19%. Anglo
has reduced its copper production target for next year by about
200,000 tons, essentially removing the equivalent of a large
copper mine from global supply. Production will fall even
further in 2025.

BMO Capital Markets, which was forecasting a large surplus
of refined copper next year, now sees a small deficit instead.

Goldman Sachs Group Inc. — which has been much more bullish on
copper and already forecast a deficit of refined metal for 2024,
now sees that shortfall ballooning to more than half a million
tons. Jefferies also now expects a major deficit next year.

“The supply cuts reinforce our view that the copper market
is entering a period of much clearer tightening,” Goldman
analysts including Nicholas Snowdon said.

The expectation for a looser market in the near term has
weighed on prices for much of this year, leaving copper drifting
sideways. In early October, the International Copper Study Group
said it expects a surplus of 467,000 tons next year — its
largest forecast for a glut since 2014.

Live copper inventories on the London Metal Exchange had
surged since mid-year to a two-year high, but have now retreated
for three straight weeks.

“Disruptions have significantly increased, and a market
deficit is now increasingly likely,” said Jefferies. “We could
be at the foothills of the next copper cycle.”