Interesting article from 12 Jan '23
Supply Issues Are Gripping This Global Market
See, something big happened to one of our favorite metals. The world just lost almost 300,000 annual tons of copper. That’s enough copper to provide electricity to over 12 million U.S. homes.
It happened when Panama closed the Cobre Panama mine, seeking more taxes from the owner.
And it’s not just Cobre Panama. Chile, which produces more than 25% of the world’s copper supply, is also struggling to supply the market.
I first put the copper shortage on your radar yesterday. And what’s going on in Panama and Chile will help define where copper prices go next. Here’s the background…
Panama’s government has ordered to halt operations at the Cobre Panama copper mine.
First Quantum Minerals owns the mine. It’s a $20 billion company from Canada. And it’s one of the top five copper producers worldwide.
What’s so special about Cobre Panama? Two things.
First, Cobre Panama is one of the largest new copper mines brought into production in the past decade. Mind you, that’s not just for First Quantum, but worldwide.
In 2021, Cobre Panama accounted for more than half of First Quantum’s earnings before interest, tax depreciation, and amortization (EBITDA).
Second, the mine supplies 1.5% of the world’s copper.
The Panamanian government and First Quantum have been locked in a standoff over how much tax the Canadian miner should pay on its key asset.
Tax talks broke down, and the government did the unthinkable. It closed down the mine.
Now, First Quantum could still secure a deal for its mine.
Cobre Panama has created 40,000 direct and indirect jobs, and it’s the country’s biggest private investment. It also represents about 3.5% of Panama’s gross domestic product (GDP).
I just don’t see the government killing the goose that lays the golden eggs… though this happens in mining.
But, as I said above, there are more supply issues plaguing copper right now.
For instance, Chile’s copper output fell 5.5% in November. The reason? Technical difficulties and low-quality ore.
You can’t really negotiate your way out of those. It’s a mining jurisdiction problem.
But this isn’t just any jurisdiction. Chile is the world’s largest copper supplier. It produces nearly one-third of global copper.
It’s home to global mining giants like Codelco, BHP, Anglo American, Glencore, and Antofagasta.
But Chile’s copper production is dwindling. It’s been falling for four years straight – something we haven’t seen in recent decades. You can see this in the chart below.
All this makes copper another example of the disconnect between the markets and the real economy. Which, as regular readers know, I’ve written a great deal about in these pages.
Monster Squeeze in the Making
And that brings us to the heart of the matter.
As you may recall, copper is set to play a massive role in the New Energy revolution we’ve been telling you about.
Since mid-2020, global governments have spared no expense to spend their way out of the coronavirus crisis. And many are using this as a means to push the transition to a low-carbon economy.
And, as I said above, there’s a lot of money on the line.
In 2021, global governments and businesses spent about $750 billion on clean energy technologies worldwide. That was up 7% from the year prior.
Like it or not, world governments are pushing for this revolution. And they’ll need copper to make it a reality. Lots of it.
In fact, according to Goldman Sachs, copper demand is set to grow at least 600% by 2030. For context, global demand for copper grew roughly 70% between 2010 and 2020. And this was a period of unprecedented economic growth worldwide.
But just as copper demand is set to soar… supply is going in the opposite direction.
In 2021, copper stockpiles fell to multi-year lows. This was driven by rapid growth in industrial demand… the rise of electric vehicles (EVs)… and the dramatic impact of global Covid lockdowns.
Today, copper stockpiles are worryingly low. You may recall this from yesterday’s dispatch.
On the London Metals Exchange (LME), copper inventories are down to just two days’ worth of global use. The LME is the world center for trading industrial metals, so this is a big deal.
Inventories on the Shanghai Futures Exchange (SHFE) and COMEX are low, too.
Between the three exchanges, the global copper inventories represent just a few days of consumption. Yikes.
Remember, copper is vital for our everyday life. It goes into just about everything we use today – from plumbing to power lines, computers to motors.
In fact, it’s in so many of the things we use daily that its price can act as a signal for what’s going on in the overall economy.
But we simply don’t have enough supply.
Take physical, refined copper worldwide. BCA Research recently predicted a 595,000 metric ton deficit in 2022.
And just last month, Goldman Sachs published estimates that the copper market could reach a shortage of 982,000 metric tons in 2023.
If this happens, it’s possible that copper production will never be able to keep up with demand.
That’s because new copper mines take decades to achieve commercial production. And you can’t just flip a switch and start production overnight at an existing mine that has been shuttered. It takes time and money.
What This Means for Your Money
Goldman Sachs expects the price of copper to reach $6.80 per pound in the next few years. That’s up nearly 70% from its current price of $4.03.
That may or may not happen, but one thing is clear… The setup for copper couldn’t be more bullish.
So, how do you take advantage of this?
One way is to buy theUnited States Copper Index Fund (CPER). It’s an exchange-traded fund (ETF) that tracks the price of copper. So it’s a convenient way to get exposure.
Happy investing, and I’ll be in touch again soon.
Regards,
Nomi Prins
Editor,Inside Wall Street with Nomi Prins
