Ukraine war, high energy costs and ESG rules hit copper supply, keeping prices high

WHILE copper production would likely be ramping up in 2022, supply forecasts by the DBS research team still expect the metal to be in short supply for the rest of the year, thereby keeping its prices high.

As a key beneficiary of strong copper and gold prices, Chinese mining company Zijin Mining is DBS' top pick.

The ongoing war between Russia and Ukraine, high energy costs and stricter emissions standards in China have been cited as the main reasons for the continued shortage in copper, said DBS analyst Lee Eun Young in a research report on Tuesday (Apr 19).

With the copper shortage likely to persist, she expects the copper market to be in deficit of 336,000 tonnes in 2022.

Copper prices on the London Metal Exchange (LME), which is a widely accepted reference price in copper contracts, is also expected to remain high at an average of US$9,500 per tonne this year — a 2 per cent increase from the US$9,317 per tonne in 2021.

Nevertheless, the expected deficit this year has narrowed from the 430,000-tonne deficit last year.

Mined copper supply is likely to grow 4.4 per cent year on year to 22.3 million tonnes this year, and 3.5 per cent year on year to 23.1 million tonnes in 2023.

This is because of a stronger copper price environment and the normalisation of mine operations. The ramp-up in production is also likely to push the prices of treatment charges, which refer to the fees copper producers pay to smelters to have the metal treated.

As for refined copper, Lee estimates its production to grow 3.2 per cent compared to a year ago to 25.5 million tonnes in 2022, largely driven by growth in China and Chile. Supply is expected to grow further by 3.7 per cent year-on-year to 26.4 million tonnes in 2023.

However, whether it is for mined or refined copper, Lee's supply forecasts have been revised downwards due to the Russia-Ukraine war and higher energy costs.

In China, which is a crucial driver of refined copper production in 2022, downside risks for smelter activity have also increased due to the announcement of more stringent pollution controls. The government's effort to tighten environmental standards and reduce the emission of heavy metal pollutants by 2025 will drag on the growth of refined copper supply in the long term.

As for demand, Lee estimates that it is likely to remain intact in 2022 and 2023, though at lower levels than initially projected, due to the negative impact of the Russia-Ukraine war, the economic slowdown in China and higher copper prices.

Lee expects global demand for copper to increase by 2.8 per cent year on year in 2022, and 2.3 per cent in 2023. This is based on estimates that the global economy would grow 4.1 per cent in 2022 and 3.2 per cent in 2023.

"However, we expect a strong recovery in copper demand from China when the Covid-19 situation improves, and the government’s stimulus policies kick in," she added.

While the current copper shortage in 2022 is keeping prices high, Lee expects the market to switch to a slight surplus in 2023.

With long-term demand for copper likely to go up due to increasing focus on electric vehicles and renewable energy, coupled with higher production costs that come with stricter environmental, social and governance standards, Lee expects copper prices to average at about US$8,500 per tonne over the long term.