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Unlike copper demand, we believe global copper production is not healthy.
Despite the setback from the coronavirus, the outlook for copper is increasingly positive, fueled by demand from renewable energy (solar, wind, geothermal and electric vehicles or “EVs”) and a heightened risk to global production.
We believe that 2019 could be the first year since 2001-2002 (-1.1%) in which global production fell.
Why? The world's largest copper miners are failing to produce at projected levels: the industry continues to value margin over volume, with the result that growth capital is limited. In addition, existing mines get older and grades decline. According to The International Copper Study Group (ICSG), global mine production was 20.1 million tonnes in 2018 (up 3.6% from 2017). However, recently released data from ICSG indicate that production declined by about 0.7% in the first 10 months of 2019.
Furthermore, newly released data from Cochilco (Chile's state copper agency) show Codelco's copper production between January and November 2019 fell by 6%. Codelco is the world's largest copper producer, accounting for approximately 19% of global production.
Although this fall in production reflects various mine and industry-specific issues, a more important announcement for the copper market was that of a pullback by the Chilean government from its intent to fund Codelco's copper growth projects.
The recent riots and protests in Chile, in response to higher subway fares, the increased cost of living, privatization and income inequality are expected to have a long-term impact on both Chile's industrial output and copper production. As other funding imperatives put pressure on the country's treasury, we believe that Codelco's current production profile is optimistic.
In light of this, the market is in the process of adjusting its numbers. By 2025, we can see production being 330-380kt lower than current projections. This constitutes approximately 5% of global supply.
The physical properties of copper—malleable, machinable, corrosion-resistant and an excellent conductor of both heat and electricity—make it an essential component of an environmentally friendlier world. "In 10 years’ time the most strategic metal on this planet is copper, if you believe the EV story, and I do," said Mark Bristow, CEO of Barrick Gold, at the Mining Indaba in Cape Town on 6 February 2020.1
The auto industry relies on copper for motors, wiring, radiators, connectors, brakes and bearings. While an internal combustion engine contains approximately 20kg of copper, an electric vehicle contains approximately 90kg of copper—used in batteries, windings, rotors, wiring, busbars and charging points. As electric vehicle penetration grows, so demand for copper will increase, while mine supplies will face growing headwinds.
Source: ICA. December 2019. *Battery-size dependent
1Reuters: Barrick Gold denies Freeport-McMoran tie-up in the works, 6 February 2020, https://www.reuters.com/article/mining-indaba-barrick-gold/barrick-gold-denies-freeport-mcmoran-tie-up-in-the-works-idUSL8N2A63S7
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