Pedals to the metal: copper a vital cog in electric vehiclesTIM TREADGOLD

• 12:00AM APRIL 13, 2019
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The public anticipation around electric cars and their associated technologies would not be possible without copper, which is one reason why Australia’s biggest miners want more of the metal — lots more.

Another reason copper is top of the exploration and project development list of BHP, Rio Tinto and Fortescue Metals is that their current big earner, iron ore, has a built-in, best-by date, which is China’s peak demand for steel.

For now a delay in the inevitable iron ore downturn caused by a cutback in Brazilian production has kept iron ore as the big profit earner and slowed the copper rush, but not stopped it.

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The latest glimpse of where copper is headed came earlier this month at the world’s leading copper conference, Cesco, in Santiago, capital of the world’s top copper producing country, Chile.

Presentations from copper mining companies, governments and investment banks, focused on the need to boost supplies of the metal, which has so many uses beyond electronics that its price is sometimes used as a measure of global growth.

Movements in the copper price can signal an increase (or decrease) in industrial production, a key measure of the world’s economy, leading to the metal’s nickname: Dr Copper.

Right now, Dr Copper is signalling a rocky outlook because while the price is good, relative to where it’s been over the past five years, the price is also erratic and struggling to stay above the widely used measure of strong industrial production, which is when copper sells for more than $US3 a pound.

At its latest price $US2.93 a pound, most of the world’s copper miners will be enjoying higher profits than last year, when uncertainty created by the outbreak of the China-US trade war depressed industrial production and the copper price.

BHP, for example, saw its pre-tax profit from copper production fall 40 per cent in the 2018 December half year to $US1.9 billion, compared with the 2017 December half of $US3.2bn, due to a decline in the average price it received from $US3.08 a pound to $US2.54.

What all the miners want is increased exposure to a metal that has a substantial base in old industrial uses and a bright future in new technologies, especially electronics, renewable power and electric vehicles.

An electric car, according to BHP, uses four-times the amount of copper as a conventional car and, if projections for electric car production are correct, the world might even be facing a copper shortage in the next decade.

Macquarie Bank, which sent delegates to Cesco, is confident that copper is in the early stages of a bull market as demand rises, stockpiles decline and mined production struggles to keep up.

In its latest market balance analysis, Macquarie sees a modest decline in the average price this year as the trade war uncertainty knocks confidence and industrial production. However, from next year, Macquarie sees the copper price starting to accelerate into near-boom conditions.

This year’s average price of $US6493 a tonne could be a low point, with next year’s average tipped to be $US6650, rising to more than $US8000 in 2022.

Encouraging as that price forecast is, there will be a supply response, as there always is in a resources cycle, with copper specialists at London-based commodities research house CRU telling delegates at Cesco that “copper has the most promising prospects of any of the major commodities”, but new mines will be developed to catch the rising price.

RBC Capital Markets, a Canadian investment bank, agrees that the outlook for copper is excellent, but sees the expected price surge being pushed further into the future, with 2023 its big year rather than the previous 2021 tip.

Two of the best pure-play copper stocks for Australian investors to follow are OZ Minerals and Sandfire Resources. OZ wins the beauty parade because its expansion plans are more advanced than those of Sandfire.

What’s caught the eye of analysts is a plan by OZ to boost the size of its emerging Carrapateena project in South Australia by changing the planned underground mining method to lift proposed annual output from about 63,000 tonnes of copper to a potential 125,000 tonnes.

It will not be easy, or cheap, to bring Carrapateena into production, but it will be a game changer for OZ and will occur before the company’s flagship, the nearby Prominent Hill mine, stops production.

Investors like the OZ story, lifting the stock by 25 per cent since the start of the year to about $10.81 (Sandfire is up 16 per cent at $7.43), while investment banks see a continuation of the OZ rise. UBS is tipping a $12 price for OZ over the next 12 months, Macquarie sees $12.40 and Citi sees $12.50.

Other banks and broking houses are more cautious. Canaccord Genuity sees an OZ target price of $11, as does Morgan Stanley.