Copper’s ups and downs

Ibrahim Yucel of CRU North America says copper is feeling the effects of supply disruptions and the green energy transition.

copper cathodes

Photo courtesy of Aurubis

The price of copper could stabilize over the next five years but is expected to rebound going forward as supply will be insufficient to meet demand, said Ibrahim Yucel, a senior consultant with CRU North America. Yucel, who is based near Pittsburgh, spoke during the American Copper Council Fall Meeting Nov. 4 in Key Biscayne, Florida.

“Whenever it comes to copper pricing in the current market, or at any other point in time, there's always a few key trends, one of which is inflation, or fears of inflation,” he said. “Copper pricing is highly intertwined and correlated with inflation. So, whenever there is fear of increased inflation in the future, the copper price goes up.”

In addition to the inflation currently being experienced, which CRU believes to be transitory, Yucel said other factors that are “more specific and unique to this time frame” are influencing copper pricing. “First, we've seen a tightening in the scrap market. We have extraordinarily low levels of exchange inventories, amounting to less than one week of global consumption. And the last time we had that was several decades ago at a point where the copper global market was much smaller.”

He added that, according to CRU’s analysis, whenever exchange inventories fall below one week of global consumption, copper pricing experiences a major spike, “which is exactly what we've seen in the past few weeks following LME Week.” He was referencing the annual gathering of the global metals industry that the London Metal Exchange hosted from Oct. 11-15.

Supply chain issues and disruptions in the container freight market also have created a mismatch in supply and demand, Yucel said. “Cathode is either in the wrong place or at the wrong time,” he added, “and that has further multiplied the issues associated with low inventories.”

Yucel said container shipments of blister or other copper raw materials from the African copper belt to China would normally take two months but now are taking five months because of these issues, which is affecting 300,000 tons of copper per month.

Along with the spike in pricing following LME Week, Yucel said “an extraordinary backwardation to the forward curve” has been seen in the last few weeks.

Energy shortage effects

Yucel said the energy shortage that is occurring in different parts of the world, including China and Europe, is less likely to affect copper production because copper refining and smelting is less energy-intensive than smelting or refining other nonferrous metals. “Even though the worries, especially from the investor level, may have impacted copper pricing, if we look at it in terms of fundamentals, copper is not that threatened by a potential energy shortage as much as other metals might be,” he said. “You'll see much bigger impacts on other nonferrous metals before it begins impacting copper.”

Factors affecting demand

From 2000 through 2019, China was the fastest growing market for copper, accounting for the majority of global refined copper consumption, Yucel said. China's demand continued to grow in 2020, despite the pandemic, while most other markets declined because of COVID-19-related disruptions.

Because North America, Europe and other parts of the world are starting from a lower base, he added, their copper consumption is expected to grow more substantially than that of China’s.

“The other larger, more long-term driver is green energy,” Yucel said. “The way that we define green energy here is use of copper wire, busbars and other copper semis products in electrical vehicles (EVs), renewable energy, so specifically wind and wind and solar, as well as the associated build-out of infrastructure associated with getting those renewables on the grid, as well as the infrastructure associated with electric vehicle charging.”

In 2021, about 25 percent of copper consumption was associated with green energy, he said, noting that that number is expected to jump to 40 percent in 2022.

CRU is forecasting global refined copper consumption growth to be 4.7 percent in 2021, 2.8 percent in 2022 and 2 percent over the next five years, Yucel said, while China’s growth rate will be lower than the global average for next five years as it transitions to a more service-based economy. He noted that construction and infrastructure spending accounts for roughly one-third of total copper consumption in China, roughly half of which is residential construction. “So, any major disruption to residential construction prospects, which are more likely now than not, is going to have a big impact on overall copper demand in China.”

He added, “Even though demand for copper in China is declining over the next few years, we expect a continued increase, or a high level, in the copper price due to supply-side disruptions.”

India's consumption of copper is expected to grow significantly as the country invests in infrastructure construction and the electrical grid, Yucel said.

Supply chain disruptions in Southeast Asia, especially on the copper semis, fabrication and value-added manufacturing side, have lowered the overall copper consumption growth rate in that region, he said. But, as these issues are resolved, the Southeast Asian economies will rebound over the next two or three years, particularly as copper-intensive machinery that used to be made in China is relocated to Malaysia, Indonesia, Cambodia and Vietnam, Yucel added.

Regarding EVs, subsidies have been key to their adoption in Europe, and Yucel said CRU expects them to continue. While China no longer has subsidies in place, the country’s automakers are producing a new generation of vehicles with a different battery chemistry resulting in shorter ranges but pricing that is on par with internal combustion engine (ICE) vehicles

EV adoption in the U.S. is being driven by different factors, he said, including increasingly supportive policy, as well as greater model variety.

EVs can use three to four times more copper than ICE vehicles, Yucel said. Therefore, as the transition to EVs continues, copper demand will increase. CRU expects new EV sales to double over the next four years, Yucel said. The same can be said of electricity generation as solar photovoltaic and wind energy. Because these sources are more distributed than traditional power plants, he said, more insulated wire will be needed.

The supply side

CRU forecasts that growth in copper supply from mining will be 3.8 percent in 2021 and 3.4 percent in 2022, Yucel said. “And what that means is that the supply-demand balance is actually going to begin to normalize and become more balanced from 2023 onwards.”

Regarding smelting and refining capacity, Yucel said China is limiting the number of these operations. He said capacity is shifting to other countries in Southeast Asia. He added that a number of projects in Indonesia have been announced, while he also expects India’s capacity in this area to grow.

In the scrap sector, Yucel noted that Malaysia plans to follow in China's footsteps in terms of limiting or banning low-grade copper imports, which would require the establishment of a new market for these low-grade materials. “What we think is more likely to happen is a moving away from more of a global flow of scrap to more localized flows,” he said. “And you already see this in North America right now with the major investments in wire chopping that started in 2018.”

Yucel also alluded to the smelting and refining capacity that has been announced in the U.S.

He said copper should trade in the $4 per pound range through the end of the year, with pricing declining in 2022 as balances normalize before rising again as suppliers will not be able to meet demand. 

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