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Copper in 2021 – How Retail Investors Can Leverage Emerging Opportunities

A small surplus of copper is expected in 2021 as the economy recovers from the global pandemic and several new copper projects are expected to come into commission. But S&P Global predicts that a deficit in the copper market will develop and deepen over the next several years as copper supply lags behind rising demand, driven by global growth in the power and construction sectors, and an increasing demand for electric powered vehicles.

“Beyond 2020, we forecast that consumption will outstrip production over the period to 2024, resulting in a growing refined market deficit and increasing copper prices,” commented S&P Global Market Intelligence commodity analyst Thomas Rutland.

 

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Goldman Sachs analysts are bullish on copper in 2021, setting their 12-month forecast at $9,500 per tonne, up from its previous estimate of $7,500 per tonne back in October. By the first half of 2022, Goldman analysts say it is “highly probable” copper will test the record highs of $10,170 set in 2011.

After a very unpredictable 2020, Dear Retail reviews some of the factors that could influence copper prices in 2021 and beyond.

Covid-19: Production Constraint Spillover 

Copper supply was forced to play catch-up with demand in 2020 as the pandemic caused production delays at mines all over the world. Chile and Peru, which produce around ~ 40% of the world’s copper combined, were two of the countries hardest hit by the pandemic. Together they accounted for more than half of the missing 702,000 tonnes of copper output estimated for 2020, according to Russian investment bank VTB Capital’s analysts.

Copper supply constraints paired with increasing demand contributed to prices rising throughout the second half of 2020, after falling to US$4,617.50 per tonne at the onset of the pandemic in March 2020 – its lowest price in four years.

The development of several Covid-19 vaccines in recent months has boosted investor confidence, yet many major copper producing nations still do not have access to the vaccine – Africa and Latin America likely won’t get the vaccine until late 2021 or beyond. Meanwhile many countries that have received the vaccine, such as the US, have experienced significant delays in administering it. As of January 5th, only 5 million people in the US had been vaccinated, a far cry from their intended target of 20 million people by the end of December. Meanwhile, the UK has just gone into lock-down for a third time thanks to a new “mutant” Covid-19 strain.

As a result, it’s likely that travel restrictions and production delays will be in place for some time yet. Mining projects could experience further delays until more of the population has been vaccinated and global Covid-19 infection rates are under control. Given these obstacles, it’s reasonable to assume we will see supply constraint issues that have stemmed from the pandemic spilling into 2021.

The US Elections

The Georgia senate runoff election that took place on January 5th confirmed the Democrats had gained two additional seats in the Senate, which will allow them to gain a slight majority in Congress – ending a brief Split Congress scenario in which the Democrats had control of the House, while the Republicans had control of the Senate.

The Democrats’ victory should allow President-elect Joe Biden to more easily implement his proposed legislative agenda, which includes an additional $2 trillion earmarked for infrastructure and green energy spending. This should push demand for all base metals higher, especially copper – which is used in great quantities in power generation, construction, and green energy industries.

The US dollar also fell to its lowest price in three years following the election outcome, fueled by anticipated inflation and looser fiscal monetary policy. The Democrats have vowed to implement additional stimulus spending in order to boost the US economy in the wake of the pandemic, and a weaker US dollar typically boosts greenback-priced metals such as copper.

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The Rise of Global Electrification

Another item on Biden’s agenda is re-joining the Paris Agreement, which the Trump administration officially withdrew from in November of last year. The demand for copper will continue to rise globally as governments in nearly 200 nations – including the world’s largest economic superpowers – China, Europe, and now the US – continue to adopt electrification in order to meet their commitment to reduce their carbon emissions, as per the Paris Agreement.

Copper is vital to batteries that are used in electric powered vehicles, but also to their motors and charging equipment. The renewable energy industry is also heavily reliant on copper’s superior conductivity – the metal is used in renewable energy systems to generate power from solar, hydro, thermal and wind energy. Global copper production will need to rise by 3% to 6% per annum by 2030 in order for countries to meet the targets of the Paris Agreement, according to Bernstein Research.

And Then There’s China

China, being the world’s largest importer and consumer of copper, of course has considerable impact on copper supply, demand, and prices. China’s domestic supply of the red metal cannot support its rapidly growing economy, so the country must rely on copper imports to meet its needs. Refined copper imports into China increased considerably in 2020 – China customs data showed unwrought copper imports of 6.17 million tonnes in the first 11 months of 2020, an increase of 38.7% from the corresponding period last year.

The rise in Chinese demand was partly driven by the country’s own delays in the face of the Covid-19 pandemic – China produces just under half of the world’s copper and copper alloys semis, and country-wide lockdowns in early 2020 meant China’s smelters had difficulty keeping up with demand. Copper prices were also driven up from their March lows as Chinese traders bought up the commodity in the wake of the pandemic, anticipating the onset of a bull market.

China’s New International Copper Futures Contract

In November, the Shanghai International Exchange (INE) began trading monthly copper futures, in contracts based on copper to be delivered to warehouses in China. The new copper futures offered international investors exposure to China’s robust copper market for the first time ever, with the longer term goal of facilitating wider global adoption of the yuan. Copper is the most traded metal in the world, and its pricing benchmark is the London Metals Exchange (LME) contract, denominated in dollars. The new Chinese copper contract is denominated in renminbi, allowing China to boost its pricing power over a commodity that is critical to its economy, while protecting itself from the negative impact of downturns in international markets.

China followed a similar model with the launch of its international crude oil contract in 2018, in order to strengthen its pricing power in international markets. When the pandemic and the US oil price war caused US crude prices to fall below zero, China’s crude oil contract remained at around $30 per barrel, leading to a barrage of shipments into China as traders took advantage of the ability to store oil through the Chinese exchange. This ultimately opened up commodity flow and repaired international oil markets, causing prices to rise globally.

It’s difficult to predict what impact the new INE copper futures contract will have on copper prices. China has been stockpiling copper for years as part of a plan to build up strategic reserves of the widely used metal, which has kept supply tight in the rest of the world. The new copper futures contract adds another layer to this strategy, as it will ultimately allow China to become price-makers rather than price-takers.

How Retail Investors Can Find Opportunities in This Market

While there will likely be more effort from producing mines to increase their output in 2021 and beyond, additional mines will still be needed in order to supply growing global demand. Investment into copper exploration fell drastically at the onset of the pandemic in March, decreasing by an estimated 24% in 2020.

While copper prices have recovered faster than expected, budgets for copper exploration projects have not yet caught up. However, S&P Global predicts that mining exploration budgets will rebound modestly worldwide in 2021. Investors should look for opportunities in validated, early-stage copper projects that are expected to go into production within the next few years.

Here are Dear Retail’s top copper deposits to watch in 2021:

Name: Quellaveco, owned by Anglo American (OTC:NGLOY)

Location: Peru

Located in the Moquegua region of Peru, this proposed open-pit copper project is expected to achieve first production in 2022, with production capacity of around 330,000 tons of copper annually in the first 10 years of operation.

Name: Josemaria Resources Ltd (TSX: JOSE; OTCQB: JOSMF)

Location: Argentina

This copper-gold project, located in Argentina’s San Juan province, is the Lundin Group’s third major project in Argentina, having previously developed Alumbrera (now one of the world’s 10 largest copper/gold mines) and Veladero (one of the largest gold mines in the world, acquired by Barrick). Josemaria has proven probable mineral reserves of 6.7 billion lbs of copper, 7 million ounces of gold, and 31 million ounces of silver, over an expected mine life of 19 years. Initial production is expected to occur in 2021, with a payback period of approximately 3.8 years. Commercial production expected as early as 2026.

We like this project in particular because even though it’s backed by a big name, Josemaria has the unique added advantage of being an independently traded stock – that is still a junior – so the potential upside is much greater.

Name: Agua Rica, owned by Yamana Gold (TSX: YRI; NYSE: AUY; LSE: AUY) / Glencore  (LSE: GLEN; JSE: GLN) / Newmont Goldcorp (NYSE: NEM; TSX: NGT) 

Location: Argentina

Situated in Catamarca province, northwest Argentina, this gold-copper project is being jointly developed by Yamana Gold, Glencore, and Newmont Goldcorp, who signed an agreement in 2019 to develop the project using infrastructure and facilities at their existing ventures in the country. Initial analysis suggests the potential for a mine life in excess of 25 years at average annual production of approximately 520 million lbs of copper-equivalent metal.

Name: Constancia, owned by Hudbay Minerals (TSX: HBM; NYSE: HBM) 

Location: Peru

This primarily copper project (gold, silver and molybdenum are secondary minerals) is one of the largest copper reserves in the world, containing estimated reserves of 440 million tons of copper. Located in the Andes Mountains in southern Peru, Hudbay acquired the project from Norsemont in 2011, and initial production was achieved in 2014, with commercial production beginning in 2015. Constancia’s 2019 output of copper was 113, 825 tonnes.

 

Wishing you many happy returns,

Dear Retail Editorial Team

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