New Sanctions have taken 4% of copper supply away from the London Metals Exchange (LME). China the largest consumer will probably extend channels for direct sales from Russia for this new copper. Old copper can still be traded on the LME. However, Chinese banks are increasingly wanting to avoid secondary sanctions and LME rules will limit Russia's ability to sell new copper as old recycled copper. So, some of that 4% will be removed from the market. Another pressure for higher copper prices perhaps.
@MikeBrisy provided a great overview of the copper market. One item missing is the time taken to bring on new supply into the market. Over the last 30 years the market has managed to increase supply around 3.15% annually, whilst consumption has grown at the same rate. This suggests producers have managed capital allocation well, in the face of increasing environmental, labour, declining yield, more difficult mining conditions etc. One wonders how the ramp up of electrification will exercise their ability to maintain that supply/demand parallel. It's a 10 year process to get a mine concept to a point where its supplying meaningful volumes in a stable way.
Cobre Panama has stopped production due to local environmental concerns pressuring the Panamanian government. That's 5% of Panama's GDP or so, A tick over 1% of global production. Codelco (Chile) is cash strapped and declining in production through poor management. The Environmental movement in Chile, the worlds largest producer, is growing. Motheo (Sandfire) is expanding aiming to produce 50kt to 70kt (3.2mt to 5.2mt at 1.2% average yield) annually. But Africa is a difficult place to operate in. Mongolia seems safer and the massive Oyu Tolgoi (Rio Tinto) mine at a planned 470kt annually is emerging. Others are developing there.
Of course there are market cycles and preferably you want to time your entry at the start of the upswing. Maybe this is now, or maybe you can never time the market......
I'm looking around but hard to find too many barriers to market price increases at this stage, short of WW3 ......
So, I'm looking around for reasons why the currently predicted upwards momentum for copper prices, and producer values, is not what it is being said to be.
Tesla announced mid last year it would change its cars voltage systems from 12V to 48v. What does this mean? Less copper per vehicle (perhaps 75% less), as wiring can be thinner and wiring systems can be less complicated. Power can be distributed along a rail rather than be a return to point (hub and spoke) type system. EV's are therefore lighter, requiring less costly materials. As more and more technology is invested into cars more power is required. A higher voltage system enables this. Headwinds include the change for all suppliers from 12v to 48v components, inertia contributed by training requirements, the "we have always done it this way" industry participants etc but, less of a headwind than you might think at 1st when you consider how many new entrants to EV car production there are who have no or little baggage to carry. ICE vehicle manufacturers want/need to go higher voltage also to reduce costs and facilitate the continuing complexity in vehicles. Current models won't change but future models will/might, so it's not going to happen overnight. However the Tesla Ute is already 48v and larger vehicles are 24v. Tesla (Dec 2023) have shared their 48v system information with other vehicle manufacturers as it makes sense for all to standardise. Vehicle manufacturing went from 6v to 12v in the 1960's so there is precedent ( see the chart in this article https://electrek.co/2023/12/07/tesla-shares-48v-architecture-with-other-automakers-to-move-the-industry/ ) .
One medium to longer push back for copper, but not in the short term.
New Tesla low-voltage system a ‘big deal’ for copper, says Musk
Bruno Venditti | May 17, 2023 | 11:28 am Battery Metals Intelligence News USA Copper
In front of an audience of investors, Tesla CEO Elon Musk’s presentation was full of optimism during the 2023 Tesla Shareholder Meeting.
Musk said the company is progressing to achieve 20 million cars produced per year (In 2022, Tesla built 1.37 million), promised camera monitoring to ensure that children do not work in cobalt mines in Africa, and demanded more investment in lithium refineries.
In a moment that went almost unnoticed by the audience, however, Musk mentioned a change that could impact Tesla’s demand for copper.
He confirmed the automaker is switching its models’ low-voltage system from 12 volts to 48 volts.
Tesla says that starting with the Cybertruck (slated to be released this year), the Optimus robot, and all future electric vehicles, the 48V low-voltage system will be used.
“Cars have been operating with 12V batteries for basically about a century, so for the first time in I think over a hundred years we’re actually going to change from 12V outside of the drivetrain to a 48V architecture,” said Musk.
The automotive industry moved from 6V to 12V in the 1960s. Some smaller vehicles still use 6V, while larger vehicles use 24V.
In traditional 12V systems, wiring and components must be larger and heavier to handle high electrical loads. With a 48V system, Tesla expects a reduction in battery weight and cost savings. As a result, it could also result in less copper used in manufacturing.
“First approximation, that means we need only about a quarter as much copper in the car as would be needed for a 12V battery, so that’s a big deal because people often worry about whether there is enough copper,” Musk said. “Yes, there is.”
Some Tesla cars use up to 82kg of copper. For example, Tesla’s Model S uses a mile of copper just in connecting the battery packs to all electronics.
As reported by MINING.COM, to achieve Tesla’s goal of building 20 million cars per year, the company would need 1,820,000 tonnes of copper, roughly 9% of global production in 2022 or almost two years of production at Escondida in Chile, the world’s largest copper mine.
Based on Musk’s prediction of a reduction to a quarter of today’s copper usage, at annual production of 20 million electric vehicles, the company could save more than 1.3 million tonnes, which equals over $10 billion at today’s prices.
Musk is known for making some predictions that did not come true, such as saying Tesla cars would achieve full self-driving by 2015.
If his calculations are correct this time, the 48V system could be a big step for the company.
@Scot1963 yet another prediction from Musk. Who knows.
Of course Tesla is only part of the equation. Total new car and light commercial vehicle sales are some 80-85 million units globally, and eventually, that's going to pretty much all be electric, I assume. And of course, EV's are only one component of the wider electrification of the energy system. So lots of transmission, distribution, electrical wiring, transformers, control systems, etc. to be installed globally.
Although volatile, the structural uptrend in Cu price is a 20+ year phenomenon. Its not new. (see below), While Cu prices have increased sgnificantly in nominal terms, US$5000/t in 2003 is worth about US$8300/y in 2024, so the increase has been modest in real terms.
We still have a lot of copper. We've only today mined some 700 Mt globally in all history. There are c. 900Mt of reserves currently, 2100Mt identified resources with an estimated additinoal 3500 Mt of undiscovered resources, globally. With annual production of c. 26 Mt that means the global resource base covers 215 years of production at current levels, although fewer given projected growth. And the history of resource extraction is one of continuous innovation to be able to access harder and harder resources.
The issues supporting Copper price is that the grade quality of many of the resources are declining and there has also be insufficient development of the discovered resource base compared with the demand over the last 5-10 years. For me, this says that holders of high quality, low cost reserves (like $BHP and $RIO) should do well over the long run.
The firming prices are sending a signal for project development, and there will be a supply response, but copper is fundamentally different from Li in that it is harder to find, is often of lower in grade and more expensive to extract.
However, there are enough resources that we should expect a supply response, and whenever supply and demand get out of synch, there could be a future price collapse - particularly if the supply response has built up over several years. So, as with all mined resources, investors need to understand the cycle, and where their investments sit on the cost curve.
I do believe we need innovation on the demand side too, to make the uses of copper more efficient. Otherwise the amount of copper needed it going to be crazy. There is a lot more to the equation than Musk and Tesla! There are also opportunities to improve the recycling of existing copper, which is another part of the response to the high price signal.
So in that macro context, I don't see Musk's forecast fundamentally changing the investment thesis for copper. However, my investment thesis for copper means owning the right assets, and buying at the right time in the cycle. Because there will be a cycle for sure.
My current watching brief is to see if iron ore continues to soften to provide a better entry point for $RIO. $RIO will then be a beneficiary of strong copper fundamentals over the next 5-10 years, as it ramps up the OT mine in Mongolia. Of course, it also has world class iron ore, and among the greenest aluminium globally. (I find with resources, I spend more time out of them than in them, but when I'm in them I do well.)
For anyone interested in Copper, I recommend this book by the International Copper Study Group. It gives a good overview of the overall copper value chain. It is one of their few free publications.
Great commentary @Scot1963. I am super interested in battery materials, particularly graphite (or the anode), but I like to follow copper too.
PS @mikebrisy me after seeing you had changed your Strawman picture:
Outlook for copper, and therefore value of copper producers, continues to look positive. LME stocks have reduced, indicating supply side constraints, but Shanghai warehouse stocks have increased. Perhaps Chinese users, the largest market for the commodity, are grabbing what they can at today's prices expecting trading terms to deteriorate in due course? Not sure. There's always a feel of "Ostrich farms" about now when these situations emerge. Everyone gets excited and money goes in. Timing is everything right? In true strawman style I'd be interested in any data or pointers indicating this copper ostrich farm has laid too many eggs!
‘Copper’s time is now’ as traders switch from iron ore
in Commodity News 08/04/2024
Australia exported $124.1 billion worth of iron ore last financial year and $12.27 billion in copper.
Citi headlines a growing chorus of market pundits tipping copper’s rally to extend into next year due to improving demand for electric vehicles, and solar and wind power generation.
The booming AI sector will also drive demand given it is used to distribute power within, and to, data centres in the US and globally, analysts noted.
The rally in copper has also had an outsized influence on the Australian dollar compared to iron ore because the base metal is increasingly viewed as an indicator of economic growth, particularly in China.
Citi recommended that investors start buying the metal over the next three to six months, advising that any price below $US9000 was “cheap”. The broker sees prices hitting $US10,000 a tonne by the end of this year, before reaching $US12,000 the year after that.
Goldman Sachs is similarly bullish, declaring over the weekend that “copper’s time is now” as supply risks continue to mount.
The broker noted that London Metal Exchange stockpiles have nearly halved from their peak in the fourth quarter last year. However, contrasting figures released last week showed that copper inventories at Shanghai warehouses have surged to the highest level since the onset of the pandemic.
Markets were also spooked after smelters in China pledged to control capacity by rearranging maintenance work, reducing runs and delaying the start of new projects. But they stopped short of outright production cuts.
“The supply shock which began with aggressive concentrate destocking and then sharp mine supply downgrades last year has now advanced to an increasing bind on metal production,” said Goldman metals strategist Nicholas Snowdon.
Iron ore below $US90
Data released on Monday painted a mixed picture of the outlook for Chinese steel demand, with growth boosted by robust factory output and investment at the start of the year. However, nationwide steel production was only marginally higher in the first two months compared to the same time last year.
Like Citi, Goldman sees copper prices reaching $US10,000 a tonne by the end of this year and then $US12,000 by the end of the first quarter next year.
The bullish predictions stand in stark contrast to iron ore markets, where a growing number of analysts are predicting that prices could remain below $US100 a tonne in the near term. On Tuesday, however, iron ore futures were trading at around $US105 in Singapore.
The latest wave of selling to hit the bulk commodity was triggered by reports that steel mills in China were cutting production due to weaker-than-expected demand following the Lunar New Year holiday, and mills suffering extreme losses.
“The slow pick-up in steel demand in China, despite March being a seasonal peak consumption month, has weighed on steel prices, eventually triggering production curbs at some domestic steel mills,” said ING commodity strategist Ewa Manthey.
Indeed, major steel mills in the Guangdong province will cut production after local construction steel prices plunged, Bloomberg reported. Six mills will shut blast furnaces or rolling mills for maintenance during the next four weeks, cutting output by between 20 per cent and 50 per cent.
Reduced demand has sparked a build-up of iron ore at ports in China, with inventories swelling to 140.9 million tonnes last week – the highest level in more than a year.
That prompted Westpac to forecast a further drop in iron ore prices below $US100 a tonne in the third quarter, before another decline below $US90 a tonne in the fourth quarter.
Citi agreed that the sell-off in iron ore had further to run, but said it would be buyers of the commodity if prices dropped below $US90 a tonne. The broker still believes iron ore can hit $US130 in the coming months.
Macquarie said in a note this week that the sell-off in iron ore markets had opened up “value opportunities” in base metals and gold. The broker prefers South32 and Rio Tinto over BHP and Fortescue Metals among the large-cap stocks and likes Sandfire among the mid-caps.
Source: Financial Review
Perhaps I'm struggling with forlorn hope confirmation bias but outlook for copper seems to be regularly confirmed in a positive sense for next few years. See Livewiremarkets reporting on a Stanley Morgan report below. 29M being described as requiring either a copper price per lb increase or dramatic cost reduction to aid its survival. Perhaps price for copper will help them out, and a new CEO with an external fresh perspective. 29M up 4.2% today, I'm still down 35% overall. Patience required I guess ho hum. Pretty much the wider community of copper producers here in Australia, in the US and Canada are up since the start of the year.
Note suggestion Nickel and lithium may have troughed, along with improved production output in China. Or still too early to really tell.
Note whilst post date 29M announcements re its Capricorn mine it may not have taken the news into account in this report.
Holding 29M, PLS, HBM (US) in RL, 29M, PLS and SFR in SM.
Morgan Stanley’s latest views on copper, coal, gold, iron ore, nickel, and lithium (+ top ASX stock picks)
Recent data on the Chinese economy showed a pick up in industrial production, as well as copper, coal and iron ore imports.
(28/3/2024 1pm AEDT)
Livewire Markets
Major broker Morgan Stanley has reviewed a swathe of recent data on the Chinese economy and as a result has considered its top picks in aluminium, coal, copper, gold, iron ore, nickel, and lithium. Let’s investigate their key findings.
China data good for miners
Morgan Stanley notes that the latest data on industrial production in China showed a substantial and better-than-expected increase of 7%. Contrasting this, property new starts were down 29.7%.
Chinese PMI and IP. Source: Refinitiv, Morgan Stanley Research
These are two key pillars of the Chinese economy and are likely to be crucial in achieving its 2024 growth target of 5%. For Aussie investors, these two key pillars are likely to have a big impact on local commodity stocks.
Morgan Stanley sees industrial production moderating from the strong start to the year, as much of it was due to “front-loading”. On property, it acknowledges year-on-year growth rates should remain negative for some time but that they will also improve in the coming months. This is due to a combination of “more policy easing and better execution on fiscal stimulus needed to rebuild buyers' confidence”.
China - Property sales and new starts. Source: CEIC, Morgan Stanley Research
Commodities views
On the commodities front, these are Morgan Stanley’s latest views:
Steel / Iron Ore
- We’re approaching the peak season for construction and this is spurring an increase in Chinese steel output.
- Steel exports are also strong, up 31% in January-February, and this has resulted in an 8% increase in iron ore imports.
- Iron ore port inventories rose sharply into January, but have drawn down in February.
China's iron ore stock at ports and stock-to consumption ratio. Source: Mysteel, NBS, CEIC, Morgan Stanley Research
Aluminium
- Production is up 5.5% year on year in January-February
- Easing power supply tightness has assisted and should continue to support increased production – which could put “pressure” on aluminium prices in the “near term”.
Coal
- Production is down 4.2% year on year in January-February, mainly due to safety inspections.
- Consumption by power utilities is up 9.7% a year in January-February.
- The result is “Sustained high coal imports”, +23% year in January-February.
- China has returned as a “a key market for Australian coal and customers”.
Copper
- Copper markets “remain tight” due to a major mine shutdown in Panama and “disappointing guidances from various producers” in recent months.
- Inventories are “continuing to fall”.
- Copper remains the broker’s preferred base metal.
Gold
- “Gold could outperform in 2024 as rate cuts loom”.
Nickel
- “Nickel has likely troughed”
- The recent price rebound was driven by “short covering”, but “fundamentals are improving too”.
- Supply cuts are accelerating, “wiping out most of the surplus we modelled for 2024, with an added volume of around 120ktpa at risk”
- Prices to remain “choppy” though as notes rising inventories at LME warehouses.
Lithium
- Supply cuts have been slower than expected, but “are now picking up”.
- 6% or 78kt of production has been cut so far.
- On the demand side, cathode output plans “are looking better than expected”, this is “boosting” sentiment.
- The 2024 surplus is still likely, but smaller.
- The lithium/battery supply chain remains “fairly well-stocked”.
- “We may still see more downside for now, but if production cuts continue to materialise and EV volumes hold up, prices are likely closer to a trough”.
- “We expect the spot price is likely to be choppy going forward” as price recovery may temper further production cuts.
Top ASX commodity stock picks
These are Morgan Stanley's top ASX commodity stock picks “in order of preference”.
Copper
Rio Tinto (ASX: RIO)
- Due to 13% copper, revenue in 2024 will increase to around 20% by 2026
- Rating: OVERWEIGHT
29Metals (ASX: 29M)
- Due to “bottoming expectations, valuation upside”, Morgan Stanley notes around 52% of the company’s 2024 revenue will come from copper*.
- Rating: OVERWEIGHT.
Aluminium
Alumina (ASX: AWC)
- Selected because of “tight alumina market and pricing”.
- Rating: OVERWEIGHT.
South 32 (ASX: S32)
- Selected because “many of its key commodities being supported in 2024”.
- Rating: OVERWEIGHT.
Gold
Regis Resources (ASX: RRL)
- Due to “upcoming McPhillamy study”.
- Rating: OVERWEIGHT.
Iron Ore
Deterra Royalties (ASX: DRR)
- Due to “valuation upside from where the stock trades”.
- Rating: OVERWEIGHT.
Lithium
“We maintain our cautious stance on Li equities under our coverage, given ongoing Li price volatility and recent market weakness,” says the Morgan Stanley research team.
Mineral Resources (ASX: MIN)
- Due to “supported by its IO exposure”
- Rating: EQUAL-WEIGHT.
IGO (ASX: IGO)
- Due to “headwinds largely priced-in at current stock price levels”.
- Rating: EQUAL-WEIGHT.
Pilbara Minerals (ASX: PLS)
- Due to “premium valuation and significant capex plans compressing FCF generation over FY24-“25.
- Rating: EQUAL-WEIGHT.
*Note the research report which is the source of this article is dated 27 March 2024, which post-dates 29Metals announcement of the suspension of operations at its Capricorn Copper Mine. No reference was made to this announcement in Morgan Stanley’s research report.