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 2019
- U.S. demand is not expected to grow as fast in 2019 as infrastructure spending does not seem to be high on the legislative agenda early in the year; housing starts and permits are both lower than last year’s levels and construction spending is flat
- Year-to-date 2019 prices have been up with expectations of resolution to the U.S./China trade war buoying expectations for the Chinese economy
- Worldwide demand is expected to grow 2.6% annually through 2027 based on demand in the Chinese power and infrastructure market as well as expected growth in the electric vehicle market
Approximate net recovery on cost
Production trends: After a decline of 1.5 percent in 2017, world mine production grew by 5.0 percent in 2018. Growth was down in the United States due to lower production at a series of mines in the Southwest that had yield issues. Chinese and Peruvian production rates were also down; however, production rates grew in Chile, Australia, Democratic Republic of the Congo, Indonesia, Mexico, and Russia, among other countries. The International Copper Study Group has forecast worldwide mine production rates to increase 1.2 percent in 2019.
Alloy and form key to valuation: Copper can be rolled, drawn, cast, or extruded into a myriad of products. Common applications include building construction (44 percent), electric and electronic products (19), transportation equipment (20), consumer and general products (11), and industrial machinery and equipment (6). Approximately 70 percent of copper is used as a conduit for electricity. Approximately one-third of copper production is supplied from scrap with the remainder coming from mining of virgin materials. Copper is very malleable; fabrication costs as a percentage of the base metal value have, in recent years, been relatively low.
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, as fabrication costs are not recovered when the material is scrapped. Copper products in standard sizes and quantities with materials certifications that are widely used will continue to generate strong recoveries in the secondary marketplace (after being adjusted for any base metal market price adjustments).
Market improving: After plummeting prices for the metal resulted in output cuts, most industry experts agree that the worst of the copper crisis has passed. The industry’s lowest point occurred between the latter half of 2015 and the beginning of 2016. Typically, the copper market can expect approximately five percent of annual production to be disrupted by labor disputes, bad weather, government interference, power outages, or simply falling ore grades impacting production. But 2017 saw a low level of unscheduled production losses (approximately 3.5 percent) and copper prices began to rise. In December 2017, copper prices surged with no indication of a forthcoming correction. As of early 2018, prices were trending at their highest rates since 2014. Over the balance of 2018, copper prices slid based on healthy supply, weakening market fundamentals, including the weakening of the Chinese economy due to the U.S.-China trade war, as well as weaker year-over-year housing and construction trends. At the beginning of 2019, prices have been up about 12 percent with expectations of a resolution to the U.S./China trade war buoying expectations for the Chinese economy. The most recent China’s Manufacturing Purchasing Manager’s Index falling to its lowest level since March 2016 has tempered expectations for the Chinese economy in the near term, and copper pricing has flattened out in recent days.
Basis of growth: The copper industry’s growth is based on the metal’s appearance, high conductivity, corrosion resistance, ability to alloy with other metals, and malleability. While there are substitutes in specific uses, copper has entrenched itself in the electrical, electronic, and communications industries. Electric and 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, and 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, with demand increasing 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.
Caution advised: Some industry experts have warned that “caution is in order” as the Trump administration could help the copper sector by boosting infrastructure spending, but hurt global trade with greater protectionism. Other experts have indicated that large supplies of scrap could weigh on the price of copper, but scrap industry veteran Michael Lion, President of Everwell Resources Ltd. and Lion Consulting Asia Ltd., noted that he was not convinced, adding that “China’s maturing economy will continue to need high levels of copper, and scrap supplies are more transparent than in the past.” China is “the driver of global copper usage” and consumes approximately 45 percent of global copper, according to Lion.
The technology in electrical vehicles heavily relies on copper, and the more advanced the technology (and the higher sales) become, the more copper the industry will require. Copper is also necessary to manufacture wind turbines and solar energy systems, which are growing in popularity. Additionally, global demand for electricity is expected to continue, which also requires large quantities of copper.