Looming Copper Deficit - When is the Question

I wanted to start a new thread on the looming copper deficit for some time.

The article attached is centred on  BHP's forecasting guru Huw Mackay and his very recent outline in his commodity outlook report for copper. It will gladden the heart of AIS shareholders.

The article was from the weekly report by RRS doyen Barry Fitzgerald.
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BHP crystal ball gazer upgrades warning of impending copper deficit

Increasing supply challenges and ‘exponential lift’ in demand means copper price take-off must be close.
By Barry FitzGerald.
Posted on August 24th, 2023

BHP’s erudite vice president of market analysis and economics, Huw McKay, lobbed his commodity outlook report during the week alongside the company’s FY2023 profit report.
His report was interesting reading as always. The main findings from a short-term perspective were that there could be a balanced copper market emerging and that iron ore remains broadly balanced.
No surprise in the latter (price support is expected in a $US80-$US100t range) but the call on copper represents an upgrade from the call in February that the market was facing a short-term surplus with its price pressure implications.

The suggestion that the surplus which most were forecasting in the next couple of years could in fact be replaced by a balanced market does not carry the same importance for BHP in isolation as it does for the broader copper and equity markets, where negative sentiment reigns on all things copper and economic.
So it is a nice tonic for ASX-listed copper equities.
McKay made the point that better Chinese end-use demand, particularly for its green energy build-out, electric vehicles and housing completions (as distinct from housing starts where there is some real drama), and likely higher operational shortfalls at the world’s fleet of copper mines than most are forecasting, indicated the potential for a balanced copper market, or maybe just a small surplus.
As it is, the copper price is doing okay anyway at $US3.80/lb, even if it is below the June half year average of US$3.95/lb. But where things get really interesting for the metal is the medium term (FY2025-FY2026) to the long-term, (FY2027 and beyond).

McKay’s call on copper for the long-term remains super bullish, which is just as well as his bosses set out to spend as much $US20 billion expanding copper production in South Australia and Chile in coming years.
In short, McKay is forecasting “pronounced” (supply) deficits in the copper industry’s medium-term future. He did not say so, but that means a take-off in copper prices can’t be that far off, remembering that it is almost Christmas.
Actually, Mckay did reference a take-off from a demand perspective.
“These expected deficits are a joint function of historical under–investment in new primary supply and geological headwinds at existing operations intersecting with the ‘take–off’ of demand from copper–intensive energy transition spending that we expect will be a key feature of global industry dynamics as the final third of the 2020s arrives, if not earlier,” McKay said.

“Our confidence in medium term deficits is underpinned by both the demand and supply side, but if forced to elevate one over the other, supply headwinds would be the #1 motive force.
“Simply put, the supply response to supportive demand and price signals in the 2020s to date has been underwhelming, despite copper’s future-facing halo effect. And time is running very, very short to turn that story around.

“It is quite apparent that there is a very substantial disconnect between what needs to be done at the macro level to support both rising traditional demand and the exponential lift in metal needs implied by the energy transition and what is occurring at a micro level.”

McKay has previously estimated that in a “plausible upside” case for demand, the cumulative industry-wide growth capex bill out to 2030 (which will be here before we know it) could reach one–quarter of a trillion dollars.
Now he is saying that an updated analysis suggests that could be an under–estimate.
McKay added that the capex mountain presumes that there projects ready and waiting.
“The reality is that the industry’s collective set of development options is modest by comparison with prior decades, with the well–known lack of discoveries, the depth and complexity of what has been found, and the lengthening catalogue of above-ground risks and regulatory hurdles that confront project developers all adding to the challenges of bringing additional copper to end–users in a timely fashion,” he said.
“We reiterate our view that the price setting marginal tonne a decade hence will come from either a lower grade brownfield expansion in a mature jurisdiction, or a higher grade greenfield in a higher risk and/or emerging jurisdiction. None of these sources of metal are likely to come cheaply, easily – or, unfortunately, promptly.”

COPPER JUNIORS:
There is a message in all that for the junior copper explorers and would-developers out there – stick to your knitting and resist the temptation to go off on the lithium hunt, a sector BHP does not rate because of a lack of “rent” in coming years as supply grows hand over fist.
It is warming stuff for the copper juniors. They have being doing in tough in recent months as investors fret about the China slowdown.

But by BHP’s road map, their day in the sun will arrive around 2025 when the world wakes up to the profound supply deficits coming in the back third of the decade, something the market will front run by a couple of years by supporting both the copper producers and juniors.

Most of the likely candidates to benefit from that scenario have been mentioned here before and include names like Hot Chili (HCH), Coda (COD), Caravel (CVV) and Hammer (HMX). All have established copper resources with exploration upside.

CHINA:
A final message from McKay which is really a maths lesson. It has particular relevance to the current hysteria about China’s economy falling into a hole in the longer-term because of its ageing population, among other things.
While China has set a GDP growth target of 4.7% for this year, McKay reckons that come the 2030s, it will be a considerable stretch for anything in the 4s because of existing scale of the Chinese economy.
“Our mid case point estimates for growth in 2025, 2030, 2035 and 2050 are (rounded) 5%, 4¾%, 3½% and 1¾% respectively. But such is the underlying scale of the economy – in 2035 China will be roughly the same size as the US, India, Europe, and Japan put together today – 3½% growth in that year would be equivalent to $1¾ trillion of incremental new activity (PPP terms),” McKay said.

“That is roughly double the annual incremental change that China produced in the high–speed growth era of the mid–to–late 2000s.”

He said that it would also big enough to produce the equivalent of a new G20 member annually, being larger than the entire economies (in 2019) of Canada, Saudi Arabia, Australia, Thailand, Egypt, and Spain, just to name a few.
“Knowledge of that arithmetic is part of the reason why we are not perturbed that percentage rates of growth are bound to slow down. China is expected to remain the largest incremental volume contributor to global industrial value–added and fixed investment activity through the 2020s and many decades beyond: not just GDP,” McKay said.
That should mean something to long-term investors in the resources space. A confidence builder perhaps.