Jeffries: Copper the new boom metal

Via Jeffries:

In this report, we evaluate copper demand under three different scenarios. In each scenario, we assume global GDP growth of 2% per year after 2021. The key difference in each scenario is our assumed rate of growth of renewable power capacity. We also assume that investment in electric networks aside from power plants and related infrastructure grows fastest in the bull case scenario, at 1.5x GDP (assumed power demand in this scenario grows at 3% per year). This compares to an assumed 1.25x GDP in our base case scenario and 1.0x GDP in our bear case.

• Our bull case scenario is based on the IPCC Path 1, which is what is likely needed to come in under 1.5°C of global warming above pre-industrial levels by 2050. This scenario is unlikely but would lead to very significant copper market deficits that would justify a multi-year period of copper prices far above the market’s current
expectations.


• Our bear case scenario is based on the IPCC Path 4, which is a “resource and energy intensive scenario” that includes an increase in greenhouse gas emissions in the medium term before a longer term trend down to 1.5°C of global warming above pre-industrial levels by 2100. In this scenario, which is also unlikely, the copper market would be adequately supplied until 2024 and then in deficit thereafter.


• Our base case scenario is based on the average annual wind and solar capacity growth rates of the IPCC Path 1 and IPCC Path 4 scenarios. In our base case, the copper market would be in deficit starting in 2021, but the increase in the market deficit would be slower than what it would be in the bull case scenario. We believe this is a reasonable, if not conservative, scenario.

Even in our bear case scenario, we would expect the copper market to shift into deficit by 2025 and the copper price to then rise enough to ultimately incentivize new projects that would be needed to balance the market. The challenge is that new copper mine projects take at least 7-10 years to develop, and the price today, at $3.24/lb, is still below the incentive price, which we estimate to be at least $3.40/lb (at a 15% hurdle rate) for a ‘typical’ greenfield project. In addition, a high risk macro outlook is a hurdle to investing in highly capital-intensive projects as the mining industry is in an age of austerity. Regardless of how strong demand is and how high the copper price goes, and regardless of how aggressively mining companies wish to build new mine capacity, an adequate supply response will take years to materialize, in our view.

The bottom line is that the mechanism to balance the copper market over the next 5+ years will need to be a higher price leading to substitution, demand destruction and more scrap supply as an adequate mine supply response will take too long to materialize. The price at which the demand elasticity is great enough to balance the market depends on the magnitude of the implied deficits, but in our base and bull case scenarios it is not unreasonable to assume the copper price would rise to at least $5.00 per pound for an extended period before demand would adjust enough to balance the market. This point is very much underappreciated, in our view.

Australia does not export much copper.

David Llewellyn-Smith
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