Will the Price Rally for Copper Continue in 2018?

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Copper prices have surged by 17% YTD due to various factors discussed in the previous article. Although the factors mentioned may seem to be short lived, we believe that there are a couple of countervailing factors which would continue to support copper prices in the upcoming year.

Favorable Demand Prospects for Copper

Copper will continue to remain an attractive industrial metal in the years ahead especially due to its substantial usage in the production of electric vehicles (EVs). EVs consume double the quantity of copper than traditional vehicles and require an additional quantity of copper for the production of power inverters and charging infrastructure in order to facilitate the smooth functioning of these cars.

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EVs provide environmental benefits as they are not fueled by fossils and are expected to become a preferred medium of transport in future years. UBS expects 16.5 million global sales of electric vehicles by 2025, a revision to their earlier forecast of 14.2 million cars. [1] Governmental incentives for production and usage of EVs will play a significant role in meeting this sales estimate.

Insufficient Global Copper Reserves

Although 2017 saw disruption in the world’s largest mines due to intermittent factors, the major concern for the future years would be the lack of accessible copper reserves which could be mined. The below graph displays ten of the world’s largest copper mines, which depicts that none of these mines were discovered in the recent years. This poses a major concern as Wood Mackenzie estimates 5 million tons of new copper projects would be required to meet the estimated global demand for copper for the next 10 years. [2]

(Source: Freeport-McMoRan Q3 Earnings Presentation)

Lack of sufficient copper reserves highlights the fact that there is a likelihood of a huge global copper deficit being prevalent in the years to come. The below graph depicts Bloomberg’s expectation of copper deficit of .4 million tons by 2022, which would put an upward pressure on copper prices.

Strengthening of U.S. Dollar May Prove to be a Downside for Copper Prices

Despite the above stated arguments, strengthening of the dollar with respect to other currencies may prove to be detrimental for copper in 2018. Improving U.S economic outlook with the possibility of three interest rate hikes in the upcoming year would result in an increase in global demand for the dollar. Strengthening of the dollar makes dollar denominated copper comparatively expensive to global investors, thus making it an unattractive mode of investment which may prove to be a set back to the rise in copper prices, to a certain extent.

However, despite this fact, we expect the demand and supply factors to support global prices for copper in 2018. The would remain an advantage to majors such as Freeport and BHP, who could not fully benefit from the price hike in 2017 due to the disruption in their operations faced during the year. Below is our future price estimate for copper over our forecast period.

You can view our base case for Copper here and create different scenarios by using our interactive platform.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport

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Notes:
  1. 16.5 million electric vehicle sales tipped for 2025, The Sydney Morning Herald []
  2. Freeport-McMoRan (FCX) Q3 2017 Results – Earnings Call Transcript, Seeking Alpha []