Sunday, May 23, 2021

Wood Mackenzie: "Could soaring prices see copper fly too close to the sun?"

 This article is dated 18 May 2021 so after the spike up to 4.88+, the high for this go-round.

4.4805 last.

From WoodMac:

Julian Kettle  Senior Vice President, Vice Chair Metals and Mining

The steady climb in copper prices since mid-2020 – and the more recent launch into the stratosphere – puts me in mind of Senator Gracchus in the film Gladiator. Specifically, his observation that fear and wonderment is a powerful combination. Why?

Well, on the one hand many investors and speculators are suffering from a fear of missing out, having joined the copper party too late. At the same time, copper consumers face the very different fear of having to pay substantially more for their metal but without the potential to pass this additional cost on to their customers – in other words, a margin squeeze.

On the other hand, there is a real sense of wonder from producers, investors and traders who are already invested and watching prices move so far so fast. What’s more, with the energy transition set to pick up the baton when rampant recovery-induced demand loses steam, there seems to be no end in sight. The knowledge that if demand continues to grow the supply side of the equation simply cannot react fast enough creates a heady mix sure to set hearts racing.

So, are copper prices soaring too high, and too fast – is the risk of substitution looming?

Can higher copper prices be justified?

The cynic might argue that producers are deliberately holding off from green-lighting projects as a means of maintaining high prices, but that’s a little simplistic. In reality, given that they are custodians of shareholder capital, producer behaviour is determined by their responsibility to investors. Copper producers would therefore argue that much higher prices are required in order to satisfy the needs of yield-hungry investors and those looking for capital growth.

Currently the focus is on dividend distribution, but at some point investors will start to agitate for growth while continuing to expect dividend. Funding both requirements will need prices to be higher than the ~US$8,000/tonne conventional incentive price analysis would suggest. Such higher prices will have the additional benefit of compensating for the greater risk associated with projects in less favourable locations – projects that must be developed if energy transition requirements are to be met....


HT: Neil Hume, the FT's natural resources editor.

Over the last couple weeks Mr. Hume's Twitter feed has been a mini-masters class in mining and related.

Two quick examples: