Copper prices on the LME saw upward momentum in Q1 owing to tightening supply and increasing demand from the energy transition
Since bottoming out at US$7,800 in the fall of 2023, copper prices bounced back to start 2024 in higher territory, but supply surpluses kept the red metal trading in the US$8,000 to US$8,500 per metric ton (MT) range until mid-March when the price reached the US$8,559 per MT on the London Metal Exchange (LME).
Since then, the price for the metal has seen strong gains, reaching a quarterly high of US$8,973 per MT on March 18. With increasing market volatility since the start of April, the price continued its upward trend reaching US$9,365 per MT on April 10, approaching a 15 month high.
What caused the increase in price?
The prediction at the start of the year was that the price for copper would continue to be rangebound as supply maintained a surplus through 2024, even with lowered supply due to the shuttering of Cobre Panama and guidance cuts elsewhere. Deficits weren’t expected to start forming until 2025 as supply came under pressure due to increasing demand from the energy transition.
At that time, independent metals and mining consultant Karen Norton told the Investing News Network (INN), “With the market now looking more finely balanced, prices are likely to prove more susceptible to broader swings in either direction in the advent of significant news that affects the market.”
High inflation and interest rates have pushed overall refined product demand down from key sectors over the past two years. The biggest drop in demand came from the Chinese real estate sector, the single largest consumer for refined copper products. The sector has been in decline since 2021 following the collapse of real estate giant Evergrande, and while the Chinese government has been working on initiatives to stimulate growth, a rebound has yet to materialize.
However, on the supply side, the loss of First Quantum’s (TSX:FM,OTC Pink:FQVLF) Cobre Panama mine, along with guidance cuts at Anglo American, and steady declines at Chile’s Chuquicamata mine have caused the supply for concentrates to become increasingly tight. Chinese refiners lowered their treatment charges to help them compete for this limited supply, but this stressed their profitability.
In an email to INN at the beginning of April, Exploration Insights Editor and Analyst Joe Mazumdar said, “The concentrate market balance is accurately reflected in the fall of treatment and refining charges (TC/RCs). To ensure the profitability of the domestic smelters, the Chinese manufacturers have decided to cut production, bring maintenance work forward and/or delay further expansions.”
According to Mazumdar the cuts to smelter capacity will begin to put pressure on the availability of refined stockpiles and push copper closer to a deficit position sooner than expected.
This supply bottleneck caused significant gains for the metal’s price through the last half of March and into April.
While this is largely good news for copper producers as high prices and low treatment charges improve margins, Mazumdar thinks the price will need to stay elevated to have any real impact on investment into the industry.
“Companies may need a longer period of higher prices to incentivize them to build projects given the capital expenditure blowouts witnessed by the construction of projects such as Quebrada Blanca 2 by Teck Resources (TSX:TECK.A,TECK.B,NYSE:TECK) in Chile,” he said.
Cobre Panama
The event that has had the biggest impact on copper supply recently was the aforementioned closure of the Cobre Panama mine in Q4 of 2023. The mine’s annual output of 331,000 MT of copper accounted for 1 percent of global production — a significant number for an industry set to face increasing demand and a lack of incoming new supply.
The Cobre Panama mine became a contentious issue during the year as First Quantum and Panama renegotiated a company-friendly contract that dated back to 1997. The Panamanian government ultimately approved a new deal in October 2023 that guaranteed the country would receive at least US$375 million annually from First Quantum, and the company received a 20 year extension to continue operations at the mine.
However, public sentiment deteriorated after the approval, leading to protests at Cobre Panama’s mine and key infrastructure. The deal was ultimately overturned by the Supreme Court and Panamanian President Laurentino Cortizo ordered the mine to close.
First Quantum announced in December 2023 that it had launched international arbitration proceedings to challenge the court’s ruling, but so far no date has been set for the commencement of talks.
Additionally, Panama will be holding elections in May as President Cortizo completes his second and final term, meaning the country will have a new administration. Mazumdar said First Quantum intends to negotiate with the incoming administration in the hopes of striking a deal that is favorable to both parties.
“The current President will not stand in the next election in May 2024; therefore First Quantum plans on working with whomever is elected to try and re-start the mine and avoid the arbitration. Cobre Panama represents about 5 percent of the GDP of Panama and employs 30,000 to 40,000 people directly and indirectly,” he said.
Critical role of copper, government takes action
In 2022 the US government established the Minerals Security Partnership (MSP), which is now made up of 14 countries, including the US, Canada, Australia, Estonia, Japan, South Korea and Sweden, as well as the European Union. Among its goals is advancing critical mineral projects that meet environmental, governance and social standards.
In February, the MSP announced the signing of a memorandum of understanding between the Democratic Republic of Congo’s state-run mining company Gecamines and the Japan Organization for Metals and Energy Security. According to the release, the agreement will create a framework for the two to coordinate and cooperate in mineral exploration, development and production in the Lobito Corridor, where Gecamines currently oversees the production of 1.5 million metric tons of copper cathodes.
This past March the MSP held a forum on the sidelines of the Prospectors and Developers Association of Canada conference in Toronto to discuss matters around mineral security with a focus on shoring up the supply of minerals that are critical to the energy transition, including copper, and to advance the development of domestic supply chains.
At the meeting, the group confirmed they were working on 23 projects covering a breadth of minerals critical to the energy transition, including copper. Sixteen of the projects involve upstream mining and mineral extraction, seven center around midstream processing and another seven focus on recycling and recovering. As for location, six are in the Americas, five in Europe, 13 in Africa and three in the Asia-Pacific region.
The continued partnership comes amid increasing geopolitical tensions between the United States and China over key issues including the latter’s increasing build-out of mining assets in Africa. Russia’s continuing war with Ukraine has also caused a tricky diplomatic landscape.
For its part, the United States is encouraging manufacturers to use minerals from nations with which it has free-trade agreements, like those in the MSP, as part of the Inflation Recovery Act (IRA).
Ultimately, the goal of the MSP, the IRA and other regional programs is to help accelerate critical mineral projects by working with government and industry to help secure funding, provide diplomatic support and diversify supply chains.
Investor takeaway
Copper is going to face challenging market conditions in coming years as demand from renewable electricity generation, electric vehicle production and increasing infrastructure demands as urban populations grow alongside limited growth in copper production.
The stressed supply situation isn’t likely to see any relief soon, either. There is a lack of new supply in the pipeline, and new copper operations typically take 15 years to move from discovery to production due in part to permitting timelines and environmental challenges.
As for current supply, there are a number of operations facing uphill legal battles due to administrative issues and environmental concerns like those faced by First Quantum’s Cobre Panama mine and Northern Dynasty Minerals' (TSX:NDM,NYSE:NAK) Pebble project in Alaska, US.
However, now that more governments are labelling copper a critical mineral, government initiatives may help to resolve some of the bottlenecks in supply and help to get projects back on track and may even provide the influence needed to get new projects started.
Overall, a landscape is emerging that could benefit investors who are looking for long-term plays in an industry facing immense supply-side constraints in the coming years.
However, given the challenges in discovery, permitting and approval, investors should do their due diligence, researching all aspects of a company, its biggest projects and the risks associated with them.
Don’t forget to follow us @INN_Resource for real-time news updates!
Securities Disclosure: I, Dean Belder, hold an investment in Northern Dynasty Minerals.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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