$180 billion, that’s the aggregate capex value the world’s 15 largest copper producers spent between 2009 and 2015 to bring an incremental 1.2 million tons of copper supply online by 2020.
In percentage terms, this massive influx of supply represents 3.4% compound annual growth in supply over the next five years from this group of 15 copper producers which together represent two-thirds of global copper mine production.
With all this supply set to hit the market before the end of the decade, it’s clear why copper prices have struggled to gain any traction this year. In fact, copper prices are currently trading close to a five-year low, and it is not unreasonable to expect they will fall much further as additional supply comes on stream and demand remained sluggish.
UK-listed Chilean miner Antofagasta warned last week that the short-term outlook for the copper market is “is expected to continue to be volatile as national stimulus programs, macro-economic events and movements in the dollar continue to dominate the financial markets and affect the price of copper.” The company went on to say that it’s likely mining sector peers would only consider production cuts if prices weakened towards the $2.00/lb level.
Copper may reach this level sooner than many expect with the price of copper for delivery in three months falling for a fourth day to $2.105/lb in trading on the London Metal Exchange today. Prices slumped after China cut copper imports for a fourth month to the lowest level in 17 months. Adding to the bad news was the revelation that copper inventory as tracked by the London Metal Exchange rose 21% over the past three days to the highest level since November.
Copper market: A wall of supply
At the beginning of August, Goldman Sachs issued a dire forecast that the price of copper could drop as low as $1.81/lb over the next 12 months as demand continues to soften and supply ramps up.
What Goldman calls a ‘wall of supply’ is expected “to translate into higher copper smelter and refinery charges and ultimately, higher refined-copper production, set against softening demand growth.” Five key copper mines are expected to be the main contributors to the supply deluge. The Grasberg mine in Indonesia, Escondida in Chile and Sentinel in Zambia as well as Cerro Verde and Las Bambas in Peru will be the key producing mines to watch during the first quarter of 2017.
Fewer supply disruptions could mean lower prices before the end of the year. Generally speaking, analysts expect supply disruptions amounting to 5% to 6% of total output per annum, but this year disruptions have averaged less than 2%. Based on this, analysts over at BMO expect copper supply to be 600,000 tons higher-than-expected for 2016.