Copper has been on a record-breaking tear in the past year, driven largely by tariff-related trade flows. Bullish investors are betting that flatlining mine supply will drive prices even higher.
A string of disappointing results is undermining expectations that global mine supply would post at least modest growth this year. International Copper Study Group data show output fell 1.1% in the first half, with major producers Codelco and Freeport-McMoRan Inc. posting double-digit declines. Morgan Stanley, which entered the year expecting mine supply to expand, now sees it little changed or slightly lower, raising the prospect of the first annual decline since 2017.
That would be a striking outcome — copper trading near record highs should encourage miners to maximize output. Deteriorating ore quality, accidents, project setbacks and extreme weather are frustrating those efforts, and fueling concerns about whether supply can keep pace with demand as electrification gathers pace over the coming years.
For now, there’s no global shortage of refined copper, metal that has been fully processed after being dug out of the ground or recycled. Speculation about a potential US tariff on refined imports has drawn record volumes into US-based warehouses, while supplies elsewhere have grown tighter. That distortion may prove temporary, but mine-supply constraints are not, and bulls are betting those limitations will ultimately drive prices higher.
The difficulties miners face in boosting output are the underlying theme of a “very, very tight market,” Evy Hambro, BlackRock Inc.’s thematic and sector investing global head, said last month in a Bloomberg Television interview. “It’s declining grades at existing operations,” he said. “It’s tired, very, very old assets. It’s a lack of new development of supply coming into the market.”
Large mining companies tracked by Jefferies Financial Group Inc. that account for two-thirds of global supply saw first-half output fall 3.5%, including a 4.1% second-quarter drop driven mainly by Freeport, Codelco, Ivanhoe Mines Ltd. and Antofagasta Plc.
Top producer Chile has been at the center of the disappointing performance, posting its weakest second-quarter output in at least 19 years. The country cut its full-year production forecast for a second straight quarter and now expects a 2.6% decline. Chile’s state-owned Codelco has warned that even a target of modest growth this year may prove a bridge too far.
The International Copper Study Group expects global mine supply to increase 1.6% this year, though that forecast was made in April before the full extent of the first-half setbacks became clear.
Jefferies analysts said Tuesday that the latest production results from the industry reinforce their view of tightly constrained mine output, with risks to overall supply remaining firmly to the downside even as some major operations ramp up.
The Democratic Republic of Congo has been one of the few bright spots, with first-half copper shipments rising more than 4% as Chinese-backed operations including CMOC Group Ltd.’s Tenke Fungurume and Kisanfu mines continued to underpin growth.
Read More: Congo Cements Copper Powerhouse Status as Exports Rise Again
Outside the Congo, the weakness is increasingly structural. Morgan Stanley analyst Amy Gower said the industry is now feeling the effects of sharp cuts to mining investment following the commodity downturn a decade ago, leaving a much thinner pipeline of new projects. She sees the possibility of an annual decline in mine output.
Even with prices well above levels needed to incentivize investment, lengthy permitting means efforts to accelerate new mines are unlikely to deliver much additional supply before 2030, while setbacks at operating mines keep piling up.
Weather is adding to the risks, with recent disruptive storms in Chile offering a glimpse of what could be in store with forecasts of a strengthening El Niño ahead. Gower said mining disruptions have historically been greater during El Niño years, with Chile particularly exposed, and mines in Congo and Zambia potentially vulnerable because of their reliance on hydropower.
Weak mine output doesn’t necessarily translate directly into a shortage of refined metal, which also includes output from scrap. Morgan Stanley expects refined production to rise about 0.9% this year even with no growth at mines, as scarce concentrate and a massive expansion in smelting capacity encourage processors to turn to alternative feedstocks.
Analysts’ estimates for the supply-demand balance this year and next vary widely, but there’s broad agreement that constrained mine supply will remain an important support for prices. Copper on touched a record of $14,527.50 a ton the London Metal Exchange in January and is again trading not far off that level.
On Friday, benchmark LME prices headed for a 10th weekly gain — the longest such stretch since 1994 — and traded at $14,304.50 a ton at 1:51 p.m. in London.
Citigroup Inc. analyst Tom Mulqueen forecasts $15,000 a ton by year-end, with the potential to reach about $17,000 if manufacturing recovers or demand from the energy transition, data centers or strategic stockpiling proves stronger than expected. He plays down the threat from the vast US inventory buildup, arguing that even without tariffs those stockpiles are likely to unwind gradually rather than flood back onto the global market.
With demand set to outpace supply growth in the coming years, prices are likely to remain elevated, according to Anglo American Plc Chief Operating Officer Ruben Fernandes.
“Everyone is investing in copper, everyone likes copper,” he said in an interview last week. “Supply will come, but the question is how quickly.”
(By James Attwood, Yvonne Yue Li and Mariana Durao)
