Copper poised for breakout when coronavirus subsides

COPPER is trading at an historically low premium to the C1 production cost, says New York investment bank Jefferies, and as the impact of the coronavirus subsides, it does not believe a recovery in demand will be met by a corresponding increase in supply.
Copper poised for breakout when coronavirus subsides Copper poised for breakout when coronavirus subsides Copper poised for breakout when coronavirus subsides Copper poised for breakout when coronavirus subsides Copper poised for breakout when coronavirus subsides

Copper a "coiled spring"

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"This is the coiled spring in mining," it said, indicating it believes the copper price will move significantly higher as a result.

Jefferies said over the past 40 years, the copper price has been on average at a 37% premium to the 90th percentile of the C1 cash cost of production. Over the past 20 years, the period which has seen the emergence of China as a key end market, the average premium has been 54% on a C1 basis.

"The premiums today (31% on a C1 basis) are somewhat low when compared to the averages over the past 40 years and very low when compared to the more relevant averages since 2000," it said.

Further, it said the US$2.60 per pound copper price today was lower than the 90th percentile of the cash cost curve when including sustaining capex ($2.80/lb), which meant the price today was relatively deep in the cost curve on a free cash flow basis.

The copper price began 2020 in recovery mode, climbing back to almost $2.90/lb before the coronavirus hit and saw an almost instant and dramatic reduction of economic activity in China, with a knock-on impact elsewhere.

"We estimate the loss in global demand including the impact on demand in China as well as the hit to other regions could be as much as 50,000t per week," Jefferies said.

Jefferies had forecast a 127,000t copper market deficit this year and a 192,000t deficit next year. However, the firm expects a strong recovery will more than make up for this lost demand.

"While the math here suggests that our forecasted 2020 deficit would be wiped out already if this demand is permanently lost, we expect a strong recovery in demand, in part due to more stimulative fiscal policy in China, as coronavirus fears subside.

"The relative resilience of copper mining equities since the coronavirus emerged is appropriate, in our view, and we expect these share prices to move higher as the year progresses," the bank said.

Long-time copper market commentator John Gross, while agreeing the market was "trying to tell us something", was more cautious due to the counterintuitive facts he sees as being at play.

"Despite 24/7 coverage of the coronavirus that threatens global economic activity, along with a stronger dollar, and rising inventories, markets nevertheless rose in the face of the facts," he said.

"Indeed, over the past month, copper inventories held in Shanghai warehouses have nearly doubled, with total exchange warehouse stocks back to a four-month high of 450,000t. Regardless, the price of copper has thus far held support, rising 5c last week and is up 9c since the month began.

"Other metals, along with energy and equities, also climbed higher. Undoubtedly, markets are trying to tell us something, but at this point, we are not sure what the message is."

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