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Analyzing Copper’s Supply-Side Issues

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Copper’s supply-side issues

As we noted previously, copper prices have been strong this month. Despite short-term fluctuations, copper prices have been reasonably bullish for the past year. The bullishness is driven by the expected supply-side led deficit. Most analysts expect copper’s supply to fall short of demand by the end of the decade.

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Supply-side dynamics

Copper’s supply-side dynamics are different from some of the other metals. Copper miners need to replenish their falling reserves with new mines (FCX) (GLEN-L). Some of the leading copper mines including those owned by BHP Billiton (BHP) have seen falling ore grades in the past few years. While there are some previously planned expansion projects that are expected to come online in the next few years, new exploration activity has been virtually at a halt in the last few years due to lower copper prices (SCCO) (TECK).

Copper demand

Global copper demand could continue to rise in the coming years. However, the growth rates might not be as high as we saw in previous years as China transitions from an investment-driven to a consumption-driven economy. Meanwhile, some observers expect global copper demand to get a boost from electric vehicles. Copper intensity is higher in electric vehicles. While 23 kg (kilograms) of copper is used in an internal combustion engine vehicle, a hybrid electric vehicle uses 40 kg of copper, according to the International Copper Association. The copper content is even higher in plug-in hybrid electric vehicles and battery electric vehicles at 60 kg and 83 kg, respectively.

While most analysts agree about copper’s positive long-term outlook, the short-term outlook might not be as strong. We’ll discuss its short-term outlook in the next part.

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