China has seen a dip in the demand for some metals, and it’s affecting the demand for metals — especially copper.
Many large factories and producers are slowing down production to conserve energy. Meanwhile, global copper inventories have been falling at an unprecedented pace to reach near record lows. As a result, copper prices will average more than $4 a pound this year, Diego Hernandez, Head of Chilean Mining Society Sonami, told Bloomberg in an interview.
“The supply-demand equation for copper is very tight, even amid market-wide uncertainties fueled by Chinese property turmoil and a global energy crunch,” said Hernandez, a former chief executive of Codelco and Antofagasta Plc., “Supply and demand in the coming years should remain fairly tight so prices should be not extraordinary, but good — higher than long-term projections.”
After the next few years, however, firms like Goldman Sachs, Citigroup, Deutsche Bank, and BMO see a structural supply deficit opening and then widening due to rapid growth in demand from electric vehicles, renewables, and grid expansions to drive the global transition from fossil fuels and a lack of supply preparation due to chronic underinvestment over the last decade.
Hernandez doesn’t see any imminent risks for the Chilean copper industry, although rising diesel could push up costs.
Some copper companies haven’t been overly affected by the drop in price, like Solaris Resources (TSX:SLS and OTC:SLSSF), an exploration company with a portfolio of copper and gold assets in the Americas which has been driving rapid growth through ongoing exploration success at its flagship Warintza copper and gold project in Ecuador. Warintza is thought by industry observers to be emerging as a generational discovery in a sector where large-scale deposits with high grades at the surface have become increasingly rare.
By focusing on copper, the company is exploring a metal that will experience growing demand and becoming increasingly strategic to countries hoping to dominate the technologies underpinning the global energy transition. Nickel, lithium, and cobalt have experienced increased investor attention in this regard, but copper is the most fundamental metal to electrification and is expected to come into focus as structural deficits begin to open up in the next few years.
Additionally, Ecuador’s government is emphasizing foreign investment in the mining sector through robust support for responsible mining development, creating a pro-mining and investment-friendly environment isolated from many of the issues currently faced in countries like Chile. Solaris has demonstrated the highest commitment to ESG principles in Ecuador, making the Warintza project a successful example for Latin America and one that is frequently singled out by the Ecuadorian government as the model for mining in the country.
China’s situation will likely create opportunities for Solaris to fill the supply gaps as the company continues exploring one of the world’s greatest copper discoveries hitting intercepts over 1km and up to 1% copper equivalent from the surface. An updated mineral resource estimate is expected to be completed in the coming months along with a PEA in 2022, anticipated to showcase a high-grade starter pit distinguishing Warintza as one of the best global copper developments projects available globally.
China’s top copper smelters recently set floor treatment and refining charges (TC/RCs) for the fourth quarter at $70 per tonne and 7 cents a pound, three sources with knowledge of the matter told Reuters.
The fourth-quarter floor decided at a meeting of the state-backed members of the China Smelters Purchase Team (CSPT) in Shanghai, is up 27.3% from $55 per tonne and 5.5 cents a pound in the third quarter and up from $58 per tonne and 5.8 cents per pound a year earlier.
Smelters are paid by the miners to process copper concentrate into refined metal, offsetting the cost of the ore. When more supply is available, smelters can demand better terms because the charges rise and contribute to the profits for the smelters and miners.
“The global concentrate market shifted to a surplus in the second half of this year, with mine projects commissioned and ramping up production,” said Wang Ruilin, a senior copper analyst at CRU Group. “This supported spot TCs in China to increase rapidly in July and August.”
China is taking steps to ease an electricity shortage, though, more policies are needed, state media reported Tuesday.
The tight supply situation is likely to ease gradually due to measures by authorities to ensure power production and avoid cuts, the official Economic Information Daily said in a front-page report, citing unnamed industry experts.
However, longer-term the country is expected to become increasingly desperate for copper supply as it aims to achieve peak emissions by 2030 and carbon neutrality by 2060. China has targeted over $4 trillion in new investment with a strategy of transitioning the country from fossil fuels to electricity and dominating the key technology sectors, such as electric vehicles, which are expected to account for 50% of new sales by 2030, renewables, and grid technologies.