Analysts predict that Northern Copper stock price will continue to rise in the coming months. The increasing demand for copper, driven by global infrastructure projects and the transition to renewable energy, is expected to keep pushing the price of the metal higher. As a result, investors are optimistic about the future prospects of Northern Copper and anticipate further growth in its stock price.
Since the beginning of the year, copper prices have risen by 11%. In recent weeks, the London copper futures price reached an 11-month high, breaking through the $9,000 mark.
What force is driving such a rapid short-term surge in copper prices?
Several factors have contributed to the US economic recovery. One of them is the government’s fiscal stimulus measures, such as the CARES Act, which provided financial support to individuals and businesses. Additionally, the successful roll out of COVID-19 vaccines has helped to restore consumer confidence and revive economic activity.
Thirdly, there are policy expectations – potential interest rate cuts by the Federal Reserve have also provided support for copper prices because lower interest rates typically stimulate more economic activity and consumption, thereby increasing demand for industrial metals such as copper.
However, this price increase has also triggered market speculation. The current rise in copper prices has largely priced in the supply-demand gap and expectations of a Federal Reserve interest rate cut. The question arises whether there is still potential for further increases in the future.
This article will focus on exploring the underlying logic affecting copper price fluctuations and the potential for future increases.
#01 The Two Logic Influencing Copper Prices
Commodities differ from typical cyclical stocks in that they possess both commodity and financial attributes.
Through supply and demand balance sheets, commodity attributes can be demonstrated as physical goods in the supply and demand structure. A key aspect of copper’s financial attributes is its negative correlation with the US dollar index, which is manifested primarily in the global currency supply and the liquidity of copper.
Copper is known for its high liquidity and price transparency, making it easier for investors to buy and sell. Furthermore, copper’s value is often seen as a reliable indicator of economic growth, making it an attractive investment option for those looking to diversify their portfolios.
Since 2022, despite the global copper market being in a state of supply and demand tension, copper prices have not shown a sustained upward trend. This phenomenon reflects the complex interplay between commodity and financial attributes.
At the beginning of 2022, influenced by economic recovery and loose monetary policies, coupled with ongoing geopolitical risks and energy crises continuing to push inflation levels higher, copper prices oscillated upwards from historical highs. London copper hit a record high of $10,730 per ton in March.
Subsequently, the domestic resurgence of the pandemic has intermittently applied the brakes to consumer markets. Coupled with central banks worldwide, represented by the Federal Reserve, embarking on aggressive interest rate hikes under high inflation pressures, concerns about economic downturns in Europe and the United States have been further exacerbated. Copper prices swiftly and significantly plummeted under the suppression of the US dollar index, falling to $7,231 per ton in October, a decrease of over 33% from the peak.ev charge connector
Entering the fourth quarter of 2022, supported by the optimization of domestic epidemic prevention policies and expectations of a slowdown in Federal Reserve interest rate hikes, market sentiment was restored. Coupled with factors such as low inventory levels, copper prices stabilized and began to rise.
Since February 2023, copper prices have been continuously declining. As of August 21, 2023, the LME copper closing price was $8239.5 per ton.
Since late November 2023, copper prices have surged rapidly due to two main reasons:
Firstly, weakening manufacturing PMI in Europe and the United States and disappointing US employment data, coupled with unexpected declines in inflation data, have reinforced market expectations that the Federal Reserve’s interest rate hikes have come to an end.
Secondly, increased disruptions in overseas copper supply have sparked concerns about supply tightening in the market.
Specifically, (1) Since late October 2023, a truck driver strike in the Democratic Republic of the Congo has disrupted copper transportation in the country, affecting copper mines such as Kamoa Kakula under Ivanhoe Mines and Kamoto under Glencore to some extent; (2) In early November 2023, the Panamanian government approved an agreement with First Quantum Minerals, leading to nationwide protests in the country. As a result, the transportation port of Cobre Panama, a mine under First Quantum, was blocked, affecting production operations.
In summary, copper price fluctuations are determined by both commodity attributes and financial attributes.
The commodity attributes of copper, namely supply and demand fundamentals, determine the medium to long-term price trends, while financial attributes have a significant impact on short-term price fluctuations. If commodity attributes and financial attributes resonate in the same direction, copper prices often experience sharp rises or falls; if they diverge, copper prices tend to oscillate upwards or downwards based on changes in the supply-demand situation.
The recent breakthrough in copper prices is mainly based on the resonance between its financial attributes and commodity attributes.
Currently, the market has begun to anticipate a slowdown in future copper supply growth, while copper prices have also already reflected expectations of Federal Reserve interest rate cuts in advance. So, has the expectation for further increases in copper prices been fully priced in?
Our analysis suggests that current copper prices have already to some extent reflected expectations of Federal Reserve interest rate cuts, and future expectations of increases are more likely to stem from imbalances between supply and demand – with actual demand being underestimated and supply being overestimated.ev charge connector
#02 Demand More Optimistic Than Expected
Traditionally, global copper demand primarily relies on the Chinese market, with Chinese copper demand mainly driven by the real estate sector.
Currently, the main countries consuming copper globally include China, the United States, Germany, Japan, and South Korea, with these five countries accounting for approximately 70% of global consumption in 2022. Particularly in China, as a manufacturing powerhouse, it consumes over half of the world’s copper resources. China’s refined copper consumption as a percentage of global consumption exceeded half for the first time in 2016, reaching 50.2%; in 2022, this proportion reached 52%.
With the current downturn in the real estate sector, the demand side of copper is inevitably facing significant pressure. China’s copper consumption growth rate has significantly slowed since 2015, dropping from double-digit growth to 2% in 2022.
In fact, although the real estate industry is an important area of copper consumption, copper applications go far beyond this.
Copper, with its excellent electrical and thermal conductivity, is widely used in several key industries including power, electronics, transportation, and renewable energy. Among these, the usage of copper materials in the power and construction industries accounted for over 50% of total consumption in 2022.
Copper plays an irreplaceable role in the transition of old and new energy systems.
As the world shifts to green energy, the evolution of energy systems is altering copper’s global demand. While demand from construction and home appliances has decreased, it has surged in wind power and photovoltaic industries. The increasing popularity of electric vehicles, with their substantial copper requirements, is also fueling demand. Notably, electric vehicles use multiple times more copper than traditional fuel vehicles.
While the Chinese real estate market declines, government infrastructure investment partly sustains copper demand. China’s crucial role in the global supply chain persists, with robust demand for copper in its manufacturing and export sectors.
Additionally, US manufacturing restructure and industrialization in emerging economies like India offer fresh copper demand prospects. US efforts to reorganize supply chains away from China spur domestic manufacturing reshoring and bolster emerging markets like Mexico, diverting some demand from China to alternative markets.
Therefore, although the downturn in the real estate market has had some negative impact on copper demand, overall, global demand for copper continues to exhibit a complex and diversified trend. This diversification of demand and the increase in new application areas enable copper prices to remain relatively stable, and even show strong performance.
With the global energy system transitioning from traditional fossil fuels to cleaner non-fossil fuels, it has become a key trend. This transformation necessitates an improvement in energy efficiency, especially in the production and consumption of electricity. Whether it’s in electricity generation, transmission, consumption, or the replacement of traditional fuel vehicles with electric vehicles, copper’s role is particularly crucial.
In this process, not only is copper demand ensured, but it is also expected to continue growing. In summary, the story of copper in the energy sector will be a long-term and ongoing narrative, reflecting its increasingly significant role in the global economy.
#03 The Difficulty of Increased Production Exceeds Expectations
Market forecasts for copper mine supply often tend to overestimate.
For example, in October 2023, the International Copper Study Group (ICSG) released a forecast report predicting a 1.9% increase in copper mine supply for 2023. However, preliminary statistics as of February 2024 showed an actual increase of only 0.5%. This deviation between forecast and reality is mainly caused by three characteristics of copper mines:
(1) Copper resources differ from typical mineral resources; their investment cycles are extremely long, and they belong to capital-intensive industries.
Exploration and development of copper mines is a long and slow process. For instance, in China, the exploration of large deposits during the geological exploration phase alone takes at least 5 years, sometimes even more than a decade. Additionally, the construction of infrastructure for copper mines takes about 2 years, and from the start of construction to formal production, an additional 3 years are needed.
It is precisely due to this characteristic that copper mine supply often struggles to respond quickly to short-term price fluctuations, making it more prone to supply-demand mismatches.
Furthermore, establishing new copper mines and smelters requires huge investments, covering aspects such as geological exploration, mine development, facilities, and infrastructure construction. Currently, the initial capital expenditure for developing a new copper mine exceeds $12,000 per ton.
The prolonged payback period and high upfront capital requirements make the copper mining industry a high-risk investment area.
(2) Declining copper ore grades and rising extraction costs have pushed up capital expenditures while continuing to be constrained.
Historically, copper prices correlate positively with capital expenditures in the industry. For instance, higher copper prices in 2010 prompted increased investments in mining operations, while lower prices from 2015 to 2020 led to reduced capital spending in copper mines.
Today, the historical positive correlation between copper prices and capital expenditures has been broken.
In 2020 and 2021, despite copper prices entering an upward cycle, the capital expenditure in the copper industry did not significantly increase due to the impact of the global pandemic, strikes, and the decline in ore grades at some mines. This phenomenon led to the industry’s capacity peaking since 2013 and maintaining at low levels since 2015, implying that copper supply may shrink in the coming years.
Next, as copper mines continue to be mined, ore grades will continue to decline. Coupled with rising labor and equipment costs, the cost of copper mining will become increasingly higher, and capital expenditure will remain constrained.
According to Bloomberg data, the average global copper ore grade decreased from 0.85% in 2003 to 0.42% in 2022, indicating a rapid deterioration in resource quality. Additionally, new mining areas are typically located in geographically more complex and remote areas, such as high mountains or deserts, further increasing mining costs.
According to data from ahead of the herd, the initial capital expenditure to develop a new copper mine increased from $4,000-5,000 per ton in 2000 to over $10,000 per ton in 2012, and currently exceeds $12,000 per ton. This continuous increase in costs implies that higher copper prices are needed to stimulate companies to expand capital expenditure in the future.
Copper mining and processing are complex and costly, and with the gradual depletion of mineable copper resources, the future mining will be more challenging, and costs will further increase. Under the combined influence of these factors, it is expected that the growth rate of capital expenditure may turn negative after 2024.
Extreme weather, geopolitical risks, and frequent safety accidents are another key factor limiting a significant increase in global copper supply.
Currently, global copper production is mainly concentrated in five countries: Chile (27.8%), Peru (10.9%), China (8.9%), the Democratic Republic of the Congo (8.9%), and the United States (5.9%). Chile and Peru contribute nearly 39% of global copper production.
Chile, especially affected by prolonged drought, is facing a significant decrease in rainfall, leading to a continuous decline in copper production. For example, by October 2022, copper production in Chile reached 4.41 million tons, a 5% year-on-year decrease. The copper mining and concentrate production processes require a large amount of water resources. In November 2023, Chile’s copper production further decreased to approximately 445,000 tons, with Codelco reporting a year-on-year production decline in the fourth quarter of 2023, reaching the lowest level in 25 years.
In Peru, frequent protests by the public have created significant uncertainty in copper output. For instance, in April 2022, the declaration of a state of emergency in the Neotocumarshal province in the southern Moquegua region led to the shutdown of two large copper mines, further exacerbating global copper supply tensions.
Political factors also pose significant challenges, as seen in November 2023 when the Supreme Court of Panama ruled the government’s contract with Canada’s First Quantum Minerals for copper mine operation unconstitutional, signaling the possible closure of the Cobre Panama copper mine.
It is expected that throughout 2024, the global copper market will continue to face many uncertainties, including major economic elections, the rise of resource nationalism, and extreme weather events, all of which could lead to a slowdown in overall supply growth.
Market analysts generally expect these factors to impact global copper production by approximately 400,000 tons in 2024. Specifically, the suspension of the First Quantum mine in Panama due to unconstitutional issues is expected to reduce global copper supply by about 750,000 tons compared to previous estimates. Meanwhile, Anglo American Resources has lowered its copper production target for 2024 from 1 million tons to 790,000 tons.
In summary, considering the long cycle from exploration to production of copper mines and the current constraints on capital expenditure, it is expected that the new capacity expansion of copper mines will struggle to keep up with the pace of demand growth.
Looking ahead to 2025 and beyond, the situation may become even more challenging, which is one of the reasons why copper should be given more attention at present.
Conclusion
Copper price fluctuations are determined by both its commodity and financial attributes.
The recent breakthrough in copper prices mainly stems from the resonance between its financial and commodity attributes.
The current copper price already partly reflects the market’s anticipation of the Fed’s interest rate cuts. However, future expectations of price increases may be more rooted in the imbalance between supply and demand:
On the demand side, growth in developing countries outside China and the transition to new energy systems contribute to demand growth. On the supply side, factors such as capital-intensive long-cycle industries, declining resource endowments, limited capital expenditure, extreme weather, geopolitical risks, and frequent safety accidents constrain global copper supply growth.
It is estimated that by 2025, the copper supply-demand gap may widen to around 2 million tons. This significant supply-demand imbalance will provide some support for copper price increases.
Of course, when evaluating investment opportunities, potential risks should not be overlooked. In the copper market, these risks include not only uncertainties at both ends of supply and demand but also macroeconomic factors, particularly the monetary policy direction of the Fed.
References:
• Geology Dog’s Mining Investment Notes “Copper: Overestimated Supply, Underestimated Demand”
• Open Source Securities “Copper: Why Start a Large-scale Cycle”
