Near-term glut vs. medium-term optimism: Copper in five charts | Insights | Bloomberg Professional Services

This analysis is by Bloomberg Intelligence Senior Industry Analyst Grant Sporre and Bloomberg Intelligence Senior Industry Analyst Alon Olsha. It appeared first on the Bloomberg Terminal.

The copper market may switch to two years of surpluses from two years of deficits — a meaningful glut if there’s a developed market recession. Mined-supply growth is strong over the next two years but runs out of steam toward the end of the decade, leading to price optimism, some of which is already priced into copper-miner valuations.

Hefty copper surplus if developed-market recession

Copper supply may outpace the uplift in demand by 80-100 bps in 2023 and 2024, based on our core scenario, leading to a small surplus in 2023 (less than 100,000 metric tons) and a more significant one in 2024 (350,000-plus tons). Under this outcome, copper-demand growth from developed markets — including Europe, US, Japan and Developed Asia (Korea and Taiwan) — will be extremely limited, consistent with well-below trend GDP expansion, but avoiding a recession. In a scenario where these regions enter a recession — with GDP contracting 2-4% — copper demand is also likely to contract 1-3%, dragging global demand back to just 1%. In this recession outcome, supply could outpace demand by 200 bps, leading to a 2023 copper surplus of close to 400,000 tons.

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Renewables add spark to 2023 power-generation demand

Power generation accounts for a modest 7% of global copper demand, yet clean-energy capacity growth could boost the subsector’s appetite for the metal by 11% annually over the next ten years, to 3.7 million tons by 2031. A 65-75% execution rate on BNEF’s long-term new-energy outlook supports our scenario. That growth could be accelerating with 2022’s installed capacity additions of 467 gigawatts well above 2021’s 368 GW, driven mainly by solar installations. A renewed push in wind and a continuation of solar installations could drive 2023 capacity additions to over 560 GW, boosting copper demand by 250,000 tons.

Utility-scale photovoltaic and onshore wind installations may see a sharp uplift from 2025 onward, though these additions could be offset by retirements to oil and coal power-plant installations.

Coordinated push across the board to boost supply 7%

A significant boost from both greenfield and brownfield projects — alongside a recovery in the base mining fleet — may spur an 7% global annual increase in copper supply over the next two years, based on our bottom-up analysis of mined supply. Greenfield output additions could account for 40% of new copper-mine supply over the next two years, while brownfield expansions make up 33%. At least 27% of the increase could come from the base of existing, albeit aging mines, with 2022 the first year of a meaningful post-Covid-19 recovery. Yet from 2025, the base of mined supply starts to fade, with over 1.4 million tons of depletion and closings over the next six years.

As of 2027, new expansions and greenfield mines will need to offset output declines. Accommodating for a growing market will be an entirely separate challenge.

Filling copper’s late-decade gap demands fast-tracking

The copper market has a host of greenfield, brownfield and mine-life extension options totaling over 17 million tons by 2030. Many are unlikely to receive the necessary approval or funding by that date, yet only 3-4% of the identified capacity (3.7 million tons) need be commissioned to offset depletion and satisfy additional demand. This may seem low in percentage terms, but the absolute tonnage is substantial requiring speedy project approvals to ensure a balanced market toward the end of the decade.

Balancing the market from 2026 onward will mean adding 650,000-700,000 tons of new capacity or mine extensions each year, based on our calculations. That suggests at least 2 million tons of greenfield project capacity needs to be fast-tracked vs. our core scenario, to ensure supply hits the market before 2030.

Bullish 2023 being priced into copper miner valuations

The global mining sector is trading at one standard deviation above its mid-cycle EV-to-Ebitda of 6.6x, which implies a bullish copper price for 2023 leaving the sector with no valuation buffer in the event that prices disappoint. The sector’s rerating from the June lows has been by virtue of a downward adjustment of consensus copper prices, which the market now sees as overdone. If 2022 is a guide, the risk of higher-than-expected cash costs and production guidance downgrades remains. The copper-mining sector continues to trade at a significant premium (3.4x) vs. the broader MSCI Mining Index, which indicates to us that the market’s belief in copper’s decarbonization role remains steadfast. The sector is also trading in line with the FTSE 100 — a rare occurrence over the past decade.