Copper Market Outlook: Short-term weakness, long …...2015 2020 2025 2030 2035 Scrap used in...

Copper Market Outlook: Short-term weakness, long-term strength

Erik Heimlich

Principal analyst

Copper to the World Conference,

Adelaide Convention Centre,

18th June 2019

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Legal notice

2

Copper Concentrates Market Outlook May 2019 Update

http://www.crugroup.com/privacy/

Contents

3

From long to short Policy uncertainty

Receding deficits Long-term strength

Copper Market Outlook

Price falls below $6,000/t; approaches 90th percentile cash cost position

4Data: CRU, LME

4,500

5,500

6,500

7,500

Jan-2018 Jul-2018 Jan-2019

LME 3M, US $/t 90th percentile cash cost

Daily LME 3-month copper price, $/t


Low growth on the supply side suggested

the copper market could tighten…

…but demand picture outside

of China has softened in 2019.

Low visible copper stocks give only a partial view of the market

5

0

500

1,000

1,500

Jan-2017 Jan-2018 Jan-2019

LME COMEX SHFE non-bonded China bonded

End of month stocks, ‘000t

0.7

0.8

0.9

1.0

Jan-2017 Jan-2018 Jan-2019

Copper content in Chinese imports of concentrates, blister,

cathode and scrap; Mt Cu, moving 3M average

Data: CRU, LME, SHFE, CFTC, IHS Markit


One pillar of support to the copper price

had been the drawdown in exchange stocks However, several indicators

suggested a rise in off-warrant

inventories.

Trade tensions and weak economic readings turn investors bearish

6

-80

0

80

Jan-18 Jul-18 Jan-19

US CFTC managed money + other reportable net positions, '000 lots

47

50

53

Jan-18 Jul-18 Jan-19

Chinese official manufacturing PMI

Data: CRU, CFTC, NBS


China’s official PMI for May was 49.4,

indicating a contraction and, more

significantly, it was below consensus

Some funds using copper as a

vehicle to play increased

macroeconomic uncertainty

Net long

Net short

Expansion

Contraction

Contents

7




China stimulus is smaller than in past and is mainly in form of tax cuts

0

2

4

6

8

10

12

14

2008-10 2015-16 2018-19

General Government LG (including Special bonds) Taxes Other

Fiscal stimulus; % of GDP

Data: CRU


8

Trade war has led to downgrade China’s GDP growth this year and next, but

revisions are small since policy easing expected to offset the decline.

Two thirds of fiscal

stimulus in the

form of taxes

Government spending will support Chinese copper demand growth

9Data: CRU, SGCC, CEIC

-12

0

12

24

36

Mar - 18 Sep - 18 Mar - 19

Investment Residential Starts

Infrastructure investment and residential starts, % y/y

-10%

0%

10%

20%

0

200

400

600

2013 2014 2015 2016 2017 2018 2019

Grid infrastructure investment y/y change

Grid infrastructure investment, Bn RMB


…but Chinese demand will not react as in previous stimulus rounds

10Data: CRU

-400

0

400

800

1,200

2000 2003 2006 2009 2012 2015 2018

Export Growth Domestic growth

Change in Chinese total copper demand y/y, ‘000t

-10%

0%

10%

20%

30%

1996 2000 2004 2008 2012 2016

% of Chinese total copper demand export related


Contents

11




China will add large volumes of demand but growth rates slow down

12Data: CRU

0.0%

2.0%

4.0%

Utilit

y

Con

str

uction

(C

ivil

and

build

ing)

Con

sum

er

Du

rable

s

Air

conditio

nin

g a

nd

refr

igera

tion O

ther

Tra

nsp

ort

Machin

ery

CAGR of key sectors; 2018-2023

13,000

14,000

15,000

201

8

Civ

il and b

uild

ing

constr

uction

Utilit

y

Air

conditio

nin

g a

nd

refr

igera

tion

Con

sum

er

Du

rable

s

Tra

nsport

Machin

ery

Oth

er

Net-

export

s a

s s

em

is o

rcable

202

3

Consumption growth by sector; 2018-2023 ‘000t


GDP to fall below

6% after 2020

IP is slowing at a faster

pace than GDP

Economy in

transition

Other priorities

other than just

short-term GDP

growth

Growth outside of China required to maintain momentum

13Data: CRU

0%

2%

4%

6%

2016 2017 2018 2019 2020 2021 2022 2023

Rest of world China Global

Growth in global refined copper demand, % y-o-y


China53%

India12%

ASEAN10%

Other8%

Europe7%

North America6%

Middle East & Turkey4%

Absolute growth in copper demand 2018-2023; %

CAGR 2018-2023 = 2%

Projects receive board approval leading to increased mine supply

14Data: CRU

0

500

1,000

1,500

2,000

Forecast inJanuary 2018

Forecast inApril 2019

2018-23 supply increase, ‘000 t

2018

2019

2020

2021

2022

2023

0

100

200

300

400

To

quepala

Exp.

Gra

sberg

BC

Ch

uq

uic

am

ata

UG

Cob

re P

an

am

a

Duo

baoshan II

Mir

ad

or

Spen

ce

Qulo

ng

Yulo

ng II

To

min

skoye

Tsaga

an S

uvarg

a

Kam

oa

I

To

rom

ocho E

xp.

Manto

verd

e S

ulp

.

Oyu

Tolg

oi II

QB

2

Quella

veco

Ce

ntine

la D

istr

ict

Akto

gay E

xp

.

El T

enie

nte

NM

L

Oly

mpic

Dam

Exp.

Rosem

ont R

anch

Tim

ok

Crista

lino

Operating Firm Probable Possible

Capacity and status of mine projects with LOM capacity >=75,000 t/y; ‘ 000 t


Cumulative

addition of

0.8 Mt to

forecast

Cash costs and US dollar supportive of copper price in medium term

15Data: CRU

0

2,000

4,000

6,000

2018 2019 2020 2021 2022 2023

90th percentile 75th percentile 50th percentile

Copper mine cash costs net of by-product, $ /t

115

120

125

130

2015 2016 2017 2018 2019 2020 2021 2022 2023

US$ broad trade weighted index, March 1973=100.


Receding deficits limit the upside for copper prices

16Data: CRU, LME

4,500

5,500

6,500

7,500

2015 2017 2019 2021 2023

High Case Low Case Base case

$/t LME 3M price

-300

-200

-100

0

100

200

2015 2017 2019 2021 2023

Refined copper market balance, 2015-2023; '000t


Contents

17




EVs are key to refined copper, without them global demand will plateau

20,000

24,000

28,000

32,000

2015 2020 2025 2030 2035

Global Refined Copper Demand - No EVs (000t)

Global Refined Copper Demand (000t)

Refined copper demand, '000 t

0

1

2

3

4

5

15 17 19 21 23 25 27 29 31 33 35

HEV PHEV BEV FCEV* Infrastructure

World EV copper consumption, Mt


18Data: CRU

BEVs reach 10% of global light

duty vehicle production in 2028.

By 2030, BEVs represent 16%

of global output.

What would be the effect of stripping

out EVs and associated infrastructure

from our demand projections?

The supply gap will reach 8 Mt by the end of the next decade

19

0

10

20

30

40

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Operating Firm Probable Possible Prospect Exploration Demand

Forecast committed copper mine production and potential from uncommitted projects versus primary copper demand; Mt


Data: CRU

Committed production

faces resource exhaustion

and declining grades

Gap between committed mine output and primary copper demand

opens up almost immediately and grows rapidly during the 2020s

Steep cash cost curve and high capex requirements for copper mining

20Data: CRU

0.0%

2.0%

4.0%

6.0%

8.0%

0 20 40 60 80 100

Ore processed (Mt/y)

Other Possible Probable Firm

Bubble size = capital expenditure

Copper projects Cu(eq) grade, tonnage and CapEx


-2,000

0

2,000

4,000

6,000

8,000

0 4,000 8,000 12,000 16,000 20,000

2018 CRU Cash Costs $/t including By-product credits; $/t

Cumulative copper production '000 tonnes

Economies of scale are

still one of the main

determinants of position

on the cost curve

Large projects can be

capital intensive

Copper mining projects are increasingly challenging to develop

21Data: CRU

0

40

0

40

80

0

40

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Open Pit Underground Grade

Chuquicamata

Grasberg

Oyu Tolgoi

Block caves throughput and head grades; Mt ore, % Cu


0.6%

0.7%

0.8%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Global head grades at milling operations; % Cu

Lower grades make mining copper

resources more challenging.

There are other factors: difficult

locations, complex mineralogy,

remoteness, lack of infrastructure…

Significant social / political challenges to develop uncommitted pipeline

22Data: CRU


0

1,000

2,000

3,000

4,000

Chile

Peru

US

A

DR

Congo

Can

ada

Arg

entina

Austr

alia

Mexic

o

Indo

nesia

Phili

ppin

es

Ecua

do

r

PN

G

Ru

ssia

Bra

zil

Oth

er

Probable Possible Prospect

2030 production capacity from uncommitted projects; ‘000 t

0

100

200

300

400

500

Resolu

tion

Ta

mpakan

Pebb

le

El A

rco

Llu

rim

agu

a

Haq

uira

Mic

hiq

uill

ay

Rio

Bla

nco

Ela

ng

Viz

ca

ch

ita

s

Pana

ntz

a

Fri

eda R

iver

Con

ste

llation

Los A

zule

s

Wa

fi-G

olp

u I

Agua R

ica

El G

ale

no

Nue

vaU

nio

n I

Probable Possible Prospect

Uncommitted greenfield projects >150kt/y by 2030; ‘000 t

Significant environmental and

social issues in some of the key

mining jurisdiction. Resource

nationalism on the rise.

0%

5%

10%

15%

20%

25%

2000-07 2007-13 2013-18 2018-23

Primary Aluminium Demand Refined Copper Demand

Annual demand growth in China, CAGR %

There are risks to the long-term view: scrap & substitution

23Data: CRU

0

1,000

2,000

3,000

4,000

5,000

2015 2020 2025 2030 2035

Scrap used in refined metal production

Direct use scrap

Copper scrap sources, copper contained; '000 tonnes


Substitution to aluminium remains a

threat, but pace of change has slowed.With strong government support

China can increase domestic

scrap generation

Copper demand

growth has lagged

aluminium in China

Conclusions

24

Copper price approaches the 90th percentile cash cost position. We think this is not reflective of market fundamentals.

China’s stimulus feeding through to real economy and copper demand, but stimulus is supportive rather than game changing.

Project pipeline firms up. Demand growth outside of China required. Receding deficits limit the upside for copper prices.

Greening of power and transportation markets to sustain long term demand. Mine project development increasingly challenging.


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