Increased demand for metals as the global economy recovers is having a massive impact on the mining industry.
The metal hit a record of $10,747 a tonne on the London Metal Exchange earlier this month but was back at $9,964 today after China threatened price controls on some commodities.
Supply risk from Covid-related mine disruption means prices are likely to stay firm over the short-term, although further ahead there are also signs of a tighter market outlook.
This was flagged by Deutsche Bank today when it raised its five-year forecast on copper prices by 17% on average, including a 14% increase in the long-term price to $8,000 a tonne.
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It notes that supply challenges are starting to intensify, with multiple countries discussing higher taxation on miners to meet demand for increased stimulus or social spending.
Chile, for example, has passed a bill that will increase royalties to about 25% of the spot price top line, while the leading Peruvian presidential candidate is calling for similar measures. This has the potential to exacerbate supply pressures if new mines are deterred from opening.
The political pressure in Chile has already resulted in shares in the country's leading copper miner, Antofagasta, falling by about 20% from their early May peak to just above 1,500p.
Analysts at Peel Hunt believe this looks to be fair value, although with sustained copper price strength there's a potential upside to 1,850p.
Antofagasta is now the only pure-play copper company of scale on the London market following the takeover of Kaz Minerals, making it the go-to stock for copper exposure. But its highly focused portfolio means it lacks the diversity of blue-chip rivals, with the added problem of currency movements priced in US dollars and costs priced in Chilean Pesos.
Deutsche Bank has a sell recommendation on Antofagasta and a target price of 1,350p, noting that the company is entering a period of increased investment at its key assets of Los Pelambres and Centinela, whereas its rivals are deleveraging.
The bank has Glencore as one of its preferred picks for copper exposure due to its self-help measures, an undemanding valuation and strong cash flows. Deutsche today raised its target price by 20p to 420p, compared with 305p currently. The bank's forecast on BHP has also increased from 2,100p to 2,200p and for Rio Tinto from 6,000p to 6,200p.
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Swiss bank UBS also published a note this week pointing to a copper price stabilising at about $7,700 over the next couple of years, which is about 20% below the current spot price.
Its analyst Dan Major said: “We don't see a material or significant shift in the supply and demand outlook to justify higher and higher prices.
“Our take is that the current run rate of demand will moderate as restocking and pent-up demand eases.”
One factor in the price acceleration has been copper's role in the green transition, such as within coil windings in the stator and rotor of wind generators or the cell ribbons and cabling of solar photovoltaic systems.
Most of the increase in consumption should be met by mined copper, but an increasing proportion is recycled as copper can be used again without degradation of its properties.
UBS notes that electric vehicles and renewables consumed about 1.5 million tonnes of copper in 2020, representing about 5% of the current market and on track to rise to between 15% and 20% over the next decade.
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But Major says this needs to be set against the prospect of slowing China demand as the country's electricity grid is expected to reduce the commodity intensity of its capital expenditure. China accounts for nearly 60% of demand having grown by about 8% to 10% a year in the decade up to 2019, but this pace is likely to slow to around 2-3% a year.
He added: “We’d need US and European demand to grow by 25% to compensate for the demand slowdown in China and drive material acceleration in global demand growth over a multi-year time horizon.
“We see it more likely that global demand maintains a 2.5-3% trend growth pace rather than show a dramatic acceleration.”
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