Commbank mining analyst Vivek Dhar says base metal prices could have overdone themselves as copper and its cousins rise against traditional indicators
\nMineLife\u2019s Gavin Wendt says investor sentiment has been behind copper\u2019s rise in 2024, but he still sees shortages and higher prices long term
\nFalling attractiveness of investing in Chile and Peru \u2013 the world\u2019s two largest copper producing countries \u2013 heaps pressure on energy transition<\/p>\n
Base metals have surged in recent days and enthusiasm in the investment community is rising.<\/p>\n
Case in point \u2014 ANZ says US$12,000\/t is now the incentive price needed to stimulate new copper production. Historic highs sit at US$10,700\/t in May 2021.<\/p>\n
Goldman Sachs has tipped that level to come by the end of 2024 in a bullish update released by its global commodities team earlier this month.<\/p>\n
But those runs for metals critical to the energy transition like heavily pumped copper, surprise packets aluminium and zinc and maligned nickel have seen some dissenting voices urge caution.<\/p>\n
\u201cCopper mine supply growth has particularly slowed with the closure of First Quantum\u2019s Cobre Panama mine at the end of last year (~1.4% of copper supply), alongside slower than expected production growth from expansions and new copper projects,\u201d Commbank\u2019s mining doyen Vivek Dhar said in a note yesterday.<\/p>\n
\u201cHowever, we think it would still be a stretch to conclude that supply\u2011side disruptions alone explain the synchronised increase in base metal prices.<\/p>\n
\u201cA preference for base metals has clearly emerged as inflation has proven more resilient, but at odds with how base metals has typically tracked against the US dollar and Chinese demand. Our concern is that base metals have got ahead of themselves.\u201d<\/p>\n
Dhar says that risk will intensify if the US dollar strengthens.<\/p>\n
Despite a stagnant but high US rates environment which has underpinned a strong US dollar and seems less likely to turn dovish by the day, copper, zinc, aluminium and even nickel have all surged higher since the start of April thanks to supply concerns and speculation.<\/p>\n
Nickel was up 2.2% Wednesday to US$19,489\/t after independence protests in French territory and major nickel supplier New Caledonia turned ugly, leaving three dead.<\/p>\n
\u201cEramet SA has halted its nickel operations there, while operations at the vast majority of mines have been suspended,\u201d ANZ\u2019s Catherine Birch, Brian Martin and Daniel Hynes said in a note.<\/p>\n
Copper rose 1% to US$10,219\/t as net longs hit their strong position since 2021. It\u2019s up 15% since the start of April.<\/p>\n
Three-month LME Zinc prices have risen 22% in the same period, with aluminium 11% better off.<\/p>\n
\u201cWhile copper has grabbed the headlines with prices surging above $US10,000\/t, a number of industrial metals have rallied strongly since the end of March,\u201d Dhar said.<\/p>\n
\u201cThe synchronised upswing across a number of industrial metals typically suggest a common factor is at play.\u201d<\/p>\n
\u201cThe US dollar typically holds a negative relationship with industrial metal prices. The logic follows that a stronger US dollar makes US\u2011dollar denominated metals more expensive for non\u2011US consumers.<\/p>\n
\u201cSince the rally in industrial metals from the end of March, the US dollar has strengthened overall, despite the fall in the US dollar this month \u2026 a rise in both industrial metals and the US dollar is unusual.\u201d<\/p>\n
While Chinese metal demand is typically a major factor in price growth, Commbank expects commodity demand in the Middle Kingdom to track sideways amid persistently a weak property sector and slowing fixed asset investment growth.<\/p>\n
Mining expert Gavin Wendt, the founder of Sydney research firm MineLife, believes there are fundamental drivers pushing copper higher.<\/p>\n
But he said much of the recent price run was down to the re-emergence of speculative investors who had abandoned the copper market last year.<\/p>\n
\u201cWe have heard all about the positive demand for copper, the fundamentals and the fact that supply is challenged \u2013 Will we be able to keep up with demand?\u201d Wendt told Stockhead<\/em>.<\/p>\n \u201cAnd I think people started to doubt that (last year) because the price weakened off, but I think you have to bear in mind that apart from traditional end user demand for copper \u2026 also there\u2019s a big speculative element so a lot of funds take positions in the copper market.<\/p>\n \u201cI think that\u2019s been the biggest driver and it\u2019s transcended some of those factors that would normally weaken the copper price like the US dollar.\u201d<\/p>\n There have been supply challenges putting pressure on copper prices in the short term.<\/p>\n The biggest hit to copper supply this year has been the early closure due to community opposition of First Quantum\u2019s Cobre Panama mine \u2014 at 350,000tpa around 4% of global primary metal supply.<\/p>\n In the world\u2019s top producing jurisdiction, Chile, production was down 0.7% YoY in March to 433,300t.<\/p>\n Other physical market factors have played a role, like overcapacity among Chinese smelters pushing treatment and refining charges negative.<\/a><\/p>\n But the market is also fairly balanced \u2026 for now.<\/p>\n \u201cHas copper already outrun those demand-supply factors? Sure, the big picture is still there. But investors are not necessarily interested in that right now,\u201d Wendt noted.<\/p>\n \u201cEnd users should be and they\u2019re concerned, but right now investors are concerned with the here and now and if they see that the market might be looking overpriced there\u2019s certainly potential for money to come out of the sector.\u201d<\/p>\n But Wendt still subscribes to the idea copper will see growing supply shortages from the energy transition, which will require an extraordinary lift in copper demand for poles and wire, EVs and renewable generation.<\/p>\n Discoveries of global scale are virtually non-existent and those reasonably sized mid-tier deposits \u2014 many of which are deep and low in grade \u2014 will need higher prices to encourage mining companies to invest and banks to provide finance.<\/p>\n The challenges facing the delivery of new projects was summed up in BHP (ASX:BHP)<\/strong><\/a> and its $64.5bn bid for Anglo American, which would make the world\u2019s biggest miner also the world\u2019s largest copper producer.<\/p>\n It shows those with the means to develop new sources of the metal would rather pay for existing tonnes than bring new ones to market.<\/p>\n \u201cIf they want exposure to copper now I think there\u2019s that feeling, if we want to bump up our proportion of earnings that come from copper we better go out and start buying some of these assets. Because of the timeframe to commission new mines, we can\u2019t just rely on our organic growth profile or our exploration team,\u201d Wendt said.<\/p>\n \u201cProbably over the years mining companies have cut back on exploration because it\u2019s a risky business \u2026 and also they know that there\u2019s going to be hot competition for assets because they\u2019re thinking \u2018well, all of our peers are thinking the same thing\u2019.<\/p>\n \u201cSo not only will we secure that asset or those assets for ourselves, but it means our competitors won\u2019t be able to get their hands on them.\u201d<\/p>\n While a mine acquired in a deal with a known position in the global cost curve will contribute to profits straight away, a new discovery could take years to be commissioned.<\/p>\n That\u2019s before the riskiest phase \u2014 ramp up \u2014 which often lasts longer and costs far more than feasibility studies envisage.<\/p>\n BHP\u2019s bid for Anglo ironically comes as the two jurisdictions in which it has copper assets \u2014 Chile and Peru \u2014 slide precipitously down the ranks of the world\u2019s most attractive mining investment destinations.<\/p>\n The 2023 Fraser Institute Annual Survey of Mining Companies, released on Tuesday, shows Peru\u2019s ranking has slipped from 24th in 2019 to 59th in 2023 in the overall investment attractiveness table.<\/p>\n Chile has fallen from 17th to 38th over the same period, though as a caveat the Fraser Institute survey tends to be hampered with sample size problems \u2013 many jurisdictions featured field less than 9 responses.<\/p>\n Still, Wendt says operating in Chile and Peru has become tougher in recent years.<\/p>\n \u201cThe fact that the risk situation in those countries is assessed to be higher than previously, yes it is a concern. It should be a concern for investors,\u201d Wendt said.<\/p>\n \u201cBecause that would indicate that there is the potential for supply out of those countries to be negatively impacted and it could also potentially impact the amount of investment dollars going into new operations.<\/p>\n \u201cCompanies that are looking around the world in terms of where they invest their money in exploration and potentially generating new discoveries may well look at other geographic locations (which are less prospective).<\/p>\n \u201cIn my view it should add to the concern about this whole renewable energy transition.<\/p>\n \u201cSouth America has been referred to as the Saudi Arabia of copper.<\/p>\n \u201cGrowing risk issues can be interpreted as a threat to future supply and on that basis there is a very real potential for impact on the overall energy transition because it just won\u2019t happen if we can\u2019t get our hands on copper in the sorts of volumes that we need to.\u201d<\/p>\n In terms of ASX stocks, Wendt said MineLife had recently initiated coverage on Revolver Resources (ASX:RRR)<\/strong><\/a>, which is aiming to get the small scale Dianne mine in Queensland up and running by the end of 2025.<\/p>\n Revolver boasts a modest resource of 18,000t of copper metal at a grade of 1.1% at the mine, once one of Australia\u2019s highest grade copper mines when it was last in operation from 1979-1983.<\/p>\n Having banked a $1.3m grant from the Queensland Government for feasibility and pre-development work earlier this year, the minnow is aiming to produce copper cathode onsite via a heap leach and electrowinning plant, with a one-year timeline from FID to first metal and four-year mine life.<\/p>\n Small-scale operations like these have struggled in recent times \u2014 Austral Resources (ASX:AR1)<\/strong><\/a> is a case in point, though a decision by mining giant and offtaker Glencore to buy its debt should aid a planned recap.<\/p>\n But copper prices are starting to put more shine on these kinds of developments, Wendt said.<\/p>\n \u201cThe marginal producers don\u2019t see a lot of love. They fall very, very quickly as the commodity price is declining. But equally when it picks up those marginal producers offer a lot of leverage,\u201d he said.<\/p>\n \u201cI\u2019m not saying that SX-EW is marginal, but certainly I think (those companies) become more attractive as the copper price increases.\u201d<\/p>\n Revolver is down 19% YTD, but up 62% in the past month.<\/p>\n <\/span><\/p>\n The post Is this copper run overcooked?<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Long term deficit<\/h2>\n
Snakes and ladders<\/h2>\n