Text | Little Lou Fish
Edit | Yang Xuran
As an important industrial metal, the price of copper has been rising. President Gabriel Boric of Chile, an important copper-producing country, made it clear that "we have noticed the rise in copper prices. ”
Judging from historical data, copper prices basically follow the trend of manufacturing PMI in China and the United States, and the current ISM manufacturing PMI in the United States has returned to the boom and bust line after 16 months, and China's manufacturing investment in January and February has a year-on-year growth rate of 9.4%, and the expected improvement in the macro economy supports the fundamentals of copper prices.
Driven by macro sentiment, commodities such as gold, crude oil and even overall non-ferrous metals that can symbolize economic and inflation expectations have all risen significantly. For example, the international gold price continues to hit record highs and has no intention of stopping, LME three-month aluminum hit a high since February 2023, and three-month tin hit a 22-month high.
This short-term rise is a good reflection of copper's financial attributes. For example, many investors are afraid to intervene in technology stocks such as Nvidia when the stock price is high, so they will choose to invest in copper and copper concept stocks - to some extent, copper is the opponent of AI in the investment market.
In fact, this also alludes to the deeper reason behind the rise in copper prices in this round, which is the significant increase in copper demand in emerging industries such as new energy and artificial intelligence, which determines its rising prices.
01 New requirements
Copper is a very important industrial metal, with electrical and thermal conductivity second only to silver, excellent ductility, plasticity and corrosion resistance, is the main component of many alloys, and is widely used in construction, machinery, power and other industries.
It can be said that the changes in copper demand are closely related to the global economic situation.
According to the International Copper Research Group ICSG, global refined copper consumption in 2023 will be 27.013 million tons, a year-on-year increase of 4.6%, and China is the world's largest copper demander, accounting for more than 50% of consumption.
At present, the driving force of China's economic growth is at a critical juncture when it switches from "old kinetic energy" such as real estate and infrastructure to "new kinetic energy" such as wind and solar power generation and electric vehicles.
According to SMM data, China's refined copper consumption in 2023 will be 15.22 million tons, a year-on-year increase of 4.5%, and the consumption of refined copper in power, home appliances, transportation, construction, machinery and electronics, and other fields will account for 46.3%, 13.9%, 12.7%, 8.1%, 8.3%, and 10.7%, respectively.
Even in the old kinetic era, electricity was the most important end-use destination for copper, with 28% of copper worldwide and 38% of copper in China consumed by the power industry.
There is a resonant relationship between the growth of electricity and copper demand, whether it is new energy vehicles or artificial intelligence, the development of these two emerging industries that China and the United States have high hopes for cannot be separated from electricity, and they are also inseparable from copper.
Key components such as batteries, motors, and high-voltage and high-speed connectors for new energy vehicles have put forward more demand for copper, resulting in 3-4 times the amount of copper used in traditional vehicles. According to the ICSG, the amount of copper used in conventional vehicles is 23kg, while the amount of copper used in plug-in hybrid vehicles and pure electric vehicles has increased significantly to 60kg and 83kg.
In 2023, the global sales of new energy vehicles will be 13.6746 million, a year-on-year increase of 35.75%, and the mainland, as the largest producer and sales country of new energy vehicles, will reach 9.58 million units, a year-on-year increase of 35.83%, of which the output of pure electric vehicles will increase by 22.63% year-on-year, and the output of plug-in hybrid vehicles will increase by 81.17% year-on-year.
It is not difficult to imagine how much copper has been consumed in the production process of new energy vehicles, not to mention how much copper consumption in the power field will be driven by the charging and battery replacement of these cars after they are on the road. The International Energy Agency (IEA) predicts that global copper demand will reach 40 million tonnes per year by 2050, based on the globally disclosed electrification vision.
Although there have been some reverse electrification trends in Europe and the United States recently, and Tesla, its local new energy vehicle brand, has also fallen into layoffs, the artificial intelligence that these countries are now betting on also has a huge demand for electricity.
Nearly 1,300 megawatt-hours of electricity is needed to train a large language model like GPT-3, which is equivalent to the annual electricity consumption of 130 American homes, and the location of data centers for companies like Google has even sounded the warning of power shortages.
Therefore, the demand for copper in the artificial intelligence industry is only increasing. According to the Morgan Stanley report, copper demand for AI data centers may grow from 200,000 tons to 500,000 tons per year in 2023 to 500,000 tons to 1.2 million tons in 2027, with a compound annual growth rate of 26%.
By 2027, AI data centers could account for 3.3% of global copper demand. In contrast, the demand for copper for electric vehicles may only account for 5.2%, but the overall growth trend will not change.
02 Copper notch
Compared with the rapidly growing industrial demand, the increase in copper supply has not been significant, and global copper mine production has not fluctuated much overall in recent years, with a CAGR of 2.4% for global copper mine production from 2002 to 2022, and copper inventories continue to be low.
As many as 600,000 tonnes of planned copper production was "wiped out" at the end of last year, adding to concerns about a copper shortage. In its February report, the ICSG pointed out that the global refined copper market had a supply shortage of 87,000 tons from January to December 2023, which shows that the overall supply and demand situation in the world is still in a tight supply.
This is because the construction period of copper mines is long, and the difference between capital expenditure and production release time is about 3-5 years, from the perspective of capital expenditure of copper enterprises, the willingness of major copper companies in the world to increase capital expenditure is low, and the global copper ore grade is showing a downward trend, and the energy utilization rate of copper ore has been on a downward trend from 2018 to 2022, from 85.2% to 79.8%.
Incremental copper mine development can almost only rely on the world's leading enterprises, but Chile, the Democratic Republic of the Congo (DRC) and Peru, as the world's major copper ore suppliers, accounting for nearly half of the total output, are currently facing their own problems.
The lack of electricity in the Democratic Republic of Congo (DRC) has constrained the expansion of the country's copper production, the country's major copper mine owned by China Minmetals is likely to halt production due to protests, and Chile, which has experienced declining production and project overruns eroding its finances, is also seeking a revival of the national copper company Codelco.
In addition, the Cobre copper mine in Panama is not expected to resume production, and the export ban on copper concentrate from Indonesia will take effect in June. Russia, one of the three largest exporters of refined copper, accounts for about 4% of global production annually and is also one of the important sources of copper inventories on the London Metal Exchange, and has also been subject to trading restrictions recently.
As recently as April 13, the United States and the United Kingdom announced a ban on the London Metal Exchange and the Chicago Mercantile Exchange from accepting newly produced Russian metals (Russian aluminum, copper and nickel), and the Office of Foreign Assets Management (OFAC) issued Executive Order 14068 banning the import of these three metals from Russia.
While the vast majority of metals are traded between miners, traders and manufacturers without the need to enter LME warehouses, the impact of the sanctions on Russia's ability to sell copper may be limited, but the combination of headwinds has undoubtedly exacerbated concerns about copper supply.
Peru also saw protests against copper mines in 2022
After holding the general manager's office meeting in the first quarter of 2024, the CSPT of China's copper raw materials joint negotiation team said that it will not set a guide processing fee for spot copper concentrate procurement in the second quarter (because the spot market has been disconnected from the real market fundamentals), but it advocates joint production cuts, suggesting a production reduction of 5%-10%.
The production cut marks that the shortage of copper ore has begun to be transmitted to the downstream refined copper industry and the country, and the possibility and certainty of a copper gap in the medium and long term are relatively high, and the market's expectations for tight supply are almost unified.
The structure of supply and demand is the main factor affecting copper prices, and the demand side dominates the contradiction between supply and demand, but the contingencies on the supply side can have a strong stimulus to the short-term trend of copper prices.
However, there is always a risk in investment trading, and long-term strength does not mean that there are no short-term shocks.
03 Lianying
Not everyone can be the one who will profit from this round of copper price increases, such as those companies that need to buy copper as a raw material for production. Relatively speaking, copper mining companies are the most likely to benefit directly.
Jiangxi Copper's share price performance (since January 2024)
Jiangxi Copper is the largest comprehensive copper production enterprise in China, with the largest Dexing copper mine and a number of copper mines in production, with an annual output of more than 200,000 tons of copper concentrate containing copper.
In terms of output, the company will produce 2,097,300 tons of copper cathode in 2023, a year-on-year increase of 14.02%, 202,000 tons of copper in self-produced copper concentrate, a year-on-year increase of -1.17%, 112.64 tons of gold, a year-on-year increase of 26.85%, and 1,817,900 tons of copper processing products, a year-on-year increase of 2.86%, with a significant increase overall.
Jiangxi Copper's self-produced copper concentrate contains about 200,000 tons of copper, which is expected to significantly benefit from the rise in copper prices. Although the company has asset impairment problems, the gross profit margin has also decreased, but this is mainly due to the business other than copper.
Tongling Nonferrous Metals now has a copper smelting capacity of 1.7 million tons, and its refining capacity is second only to Jiangxi Copper, ranking second in China and top four in the world. The company's domestic copper mine has an annual output of about 50,000 tons of copper, and in August last year, it acquired the world's largest copper mine - Mirador Copper Mine in Ecuador.
The amount of copper metal proved and controlled by the Mirador copper mine exceeds 6 million tons, and the actual mining grade is 0.6%, which is developed in two phases, and the first phase is currently in full production, with an annual output of 121,000 tons of copper and a net profit of 1.84 billion yuan, and the second phase of the project will be put into operation in the second half of 2025, with an estimated annual output of more than 140,000 tons of copper.
The Mirador Copper Mine is expected to rank among the top 20 copper mines in the world after full production, and Tongling Nonferrous Metals is also expected to become one of the top three listed companies in A-share copper production.
Zijin Mining, which has done well in copper and gold business, is the star stock in the A-share market in this round of market performance, and just hit a record high in stock price on April 16, with a total market value of more than 489.4 billion yuan.
Zijin Mining share price performance (since June 2019)
In 2023, Zijin Mining's mineral copper output will be 803,400 tons, a year-on-year increase of 10.47%, and its sales volume will be 810,700 tons, a year-on-year increase of 9.75%. At the same time, the company completed the acquisition of 48.59% equity in Tibet Juno Copper Mine, and overseas mines such as Peggy Copper and Gold Mine and Bor Copper Mine in Serbia will reach production in the next two years, with an expected compound growth rate of 10%.
Although the company's performance has increased due to the rise in the volume and price of copper, gold and other main products, the rising cost has suppressed the company's profitability. In 2023, Zijin Mining achieved operating income of 293.403 billion yuan, an increase of 8.54% year-on-year, and net profit attributable to the parent company of 21.119 billion yuan, an increase of 5.38% year-on-year, but the quarter-on-quarter decline in the fourth quarter was obvious.
In fact, reducing costs and increasing efficiency is still a headache for mining companies, and the unit cost of almost all mining companies in the world has risen in recent years.
Inflationary factors, declining mine grades and increasing mining difficulties, and rising costs such as labor and power have a greater impact on companies with mines overseas, not to mention the protests, strikes and demonstrations of local residents from time to time, which have brought a lot of uncertainty to the production of mining enterprises, and also brought risks to the performance of stock prices.
Compared with copper concept stock investors, copper futures investors need to think more about the issue of taking profits, after all, the surge in copper prices that are detached from conventional fundamentals will not only trigger the enthusiasm of longs, but also accelerate the process of selling. The Shanghai Futures Exchange recently raised the trading margin ratio and price limit of gold, silver, copper, aluminum and other futures contracts in order to warn of risks, curb excessive speculation, and prevent the formation of price bubbles.
In the case that all parties are ready to move on the copper market, the regulator once again plays the role of a "speed slower", which is obviously very necessary. But the profit-seeking nature of the business world also determines that it is okay to slow down, but it is difficult to brake.