Copper Trends, Demand & Pricing
COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Copper INDUSTRY Updated June 11, 2020
- Pricing Metrics: Copper prices reached a multiyear low for the week of March 30, 2020, amid coronavirus concerns, including the closure of the London Metal Exchange’s physical trading floor for the first time since World War II because of efforts to slow the spread of COVID-19. Prices have recovered somewhat with average prices in early June 2020 at 16.8 percent above the low daily close reached on May 30, 2020. However, June averages remain 8.0 percent below the January average for LME Copper Grade A. Copper scrap supply has been tight throughout the COVID-19-related business closures, as industrial collection activities have been reduced. Tightness in the scrap market is contributing to the market firming for copper cathode.
- Key Production Closures: Mining curtailments were announced by mining companies Freeport McMoran and Vale in late March and early April 2020. Global mining group Rio Tinto reported that its copper production for the first quarter of 2020 was 8.0 percent below 2019 levels, adding that an earthquake in Utah had halted production at its Kennecott mine in late March.
- Macroeconomic Impacts: Although demand in China was picking up as of March 2020 after an approximate two-month halt in industrial activity, concerns about markets in the rest of the world because of the still expanding pandemic, including the United States, Europe, and other regions, continue to weigh down the market.
- Valuation Outlook: Gordon Brothers expects a decline in inventory appraisal values based on pricing direction, a reduced order book going forward, as well as delayed and cancelled orders. Uncertainty and dim market sentiment will push values down as well. While a decline in equipment value is expected in the short to medium term, the longer-term prospects of the industry should be unchanged by COVID-19.
Date March 2021
- U.S. and worldwide copper mine production dropped 2% in 2020 due to the COVID-19 pandemic and related mine and primary and secondary processing bottlenecks.
- Worldwide copper refinery production grew 2% in 2020 despite pandemic headwinds and declining production rates in several key markets.
- Global demand varies by sector but is expected to grow 1% to 5.3% annually through 2025.
- U.S. copper industry revenue is forecast to increase at an annualized rate of 3.6% to $22.4 billion through 2026.
- Copper supply and demand as of April 2021 is considered to be in deficit, meaning there is more market demand than available product.
Approximate net recovery on cost
Mine Production Trends: After a 2% increase in 2018 followed by a year of zero growth in 2019, worldwide copper mine production declined by 2% in 2020 primarily because of the COVID-19 pandemic and related mine and primary and secondary processing bottlenecks. Copper supply and demand is currently considered to be in deficit, meaning there is more market demand than available product. Some of this imbalance was caused by the pandemic, but a portion is a result of underinvestment in capital spending since 2010.
Production was down 4.8% in the United States in 2020 because of output reductions at the Bingham Canyon Mine in Utah and the Chino Mine in New Mexico. While the Bingham Canyon Mine drop was a result of yield issues, the Chino Mine operations were suspended after multiple workers tested positive for COVID-19.
Additionally, operations at the Pumpkin Hollow Mine in Nevada were suspended in April 2020 because of state-level restrictions implemented in response to the COVID-19 pandemic. Operations were subsequently restarted in August. According to the International Copper Study Group, copper mining capacity is expected to increase to 29.5 million metric tons in 2024, up from 24.1 million metric tons in 2019.
Refinery Production Trends: Output of refined copper in North America dropped by 6.6% from 2019 to 2020, driven largely by declines in the U.S. at negative 11.7%. The drop in Mexico’s output at negative 1.5% was more than offset by an increase in output from Canada, which was up 3.2%. U.S. production was most heavily affected by ongoing strikes at a smelter in Arizona and electrolytic refinery in Texas. Refined copper production was also affected by maintenance at a smelter in Utah, which closed for several months for a complete furnace rebuild after an earthquake in March 2020.
Worldwide, refinery production was up in 2020 because of growth in Chile, Peru, Kinshasa, Zambia and Russia. Chinese refinery production had been down significantly early in the year but was reported to be up slightly by 0.2% by the end of 2020. Refining production capacity is expected to continue to grow through 2024, with total refining capacity expected to reach approximately 32 million metric tons by 2024, up from approximately 28 million metric tons in 2019.
Overall Demand: Worldwide demand varies by sector but is expected to grow 1% to 5.3% annually through 2025 based on strong demand in the electronics sector and expected growth in the renewable energy, housing and automotive sectors. The automotive sector is expected to particularly benefit from growth in the electric vehicle market. Since 1900, copper usage has increased at an annual compound conductor and building material, in addition to many other applications. Over the next few years, its use in renewable energy projects is expected to grow in applications such as solar arrays, wind generators, geothermal projects, fuel cells, electrical vehicle manufacturing and other applications. Electric vehicle production alone is expected to grow at an annual rate of 29% annually through 2030, and electric vehicles use four times more copper in production than conventional automobiles. Additionally, global demand for electricity is expected to continue, which requires large quantities of copper.
Market Dynamics: As of March 2021, many analysts see a supply deficit in the copper market that is set to worsen over the next several years as growing demand from the power and construction sectors is compounded by the proliferation of electric vehicles. Production for 2020 was well below expectations, as S&P global analyst Kevin Murphy noted in late 2020. “While exploration for all commodities was impacted by COVID due to lockdowns and other restrictions, the steep copper price drop in March saw a lot of caution enter the exploration sector,” said Murphy.
As a result, the cash daily price in U.S. dollars on the London Metal Exchange (LME) had reached $8,768 per metric ton as of April 1, 2021, representing an increase of approximately 84% over the same date in 2020. Copper prices reached a four-year low in March of 2020 as the COVID-19 pandemic expanded beyond Asia and began having material impacts in the North American and European markets. Prices rebounded quickly as Asian demand recovered, Chinese inventory levels reached eight-year lows, and LME stocks hit a 15-year low on February 22, 2021. LME prices reached a ten-year high of $9,615 per metric ton for high-grade copper on February 25, 2021 and remain very high.
U.S. copper industry revenue is forecast to increase at an annualized rate of 3.6% to $22.4 billion through 2026, which includes relatively strong growth in 2022 as production rates recover from the lingering effects of the COVID-19 pandemic.
Alloy and Form Key to Valuation: Copper can be rolled, drawn, cast or extruded into a myriad of products. Common industry applications include building construction (43%), electric and electronic products (21%), transportation equipment (19%), consumer and general products (10%) and industrial machinery and equipment (7%), based on information from the Copper Development Association.
Approximately 70% of copper is used as a conduit for electricity. Nearly one-third of copper production is supplied from scrap with the remainder coming from mining of virgin materials. Copper is very malleable and fabrication costs as a percentage of the base metal value have been relatively low in recent years.
As base copper prices decline, fabrication costs as a percentage of the total value of copper products will increase. As such, the scrap value of copper as a percentage of cost will decline when copper prices fall, since fabrication costs are not recovered when the material is scrapped. Copper products in standard sizes and quantities with material certifications that are widely used will continue to generate strong recoveries in the secondary marketplace, after they’re adjusted for any base metal market price fluctuations.
Basis of Growth: The copper industry’s growth is dependent on the metal’s high conductivity, corrosion resistance, ability to alloy with other metals, malleability and appearance. While there are substitutes in specific uses, copper has entrenched itself in the electrical construction, consumer electronic and communications industries.
Electrical and consumer electronic products, including power cables, account for over one-third of total copper usage, and construction, including wiring and water tubing, form a significant share. Transport industries use roughly one-eighth of the total, industrial machinery and equipment use approximately one-tenth. A wide range of consumer and other products make up the remainder.
Changes in the international price of copper drive industry performance with higher selling prices prompting producers to increase output. As with any commodity, the price is set by supply and demand, and demand increases as construction and electronics manufacturing increase. Additionally, copper and the U.S. dollar have a negative correlation; whenever the dollar rises, copper prices fall and vice versa.
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ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY
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Reference sources: U.S. GEOLOGICAL SURVEY, NATIONAL RESOURCES CANADA, BUSINESS WIRE,
IBISWORLD, S&P GLOBAL PLATTS, INTERNATIONAL COPPER STUDY GROUP, GLOBE NEWSWIRE, DELOITTE,
U.S. CENSUS BUREAU