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Daily Intelligence Briefing

Thursday, June 1, 2023

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Copper Prices Slid Lower in May, But Problems in Peru Help to Keep Long-Term Supply Squeeze in Play

Summary: Copper gave up all of its 2023 gains in May as LME inventories begun to recover and industrial activity remained subdued in key markets like China. Despite the recent uptick in inventories, copper output, relative to demand, is likely to remain in a deficit for 2023. This should add to constriction in copper’s long-term supply outlook.


A key problem area for global copper output continues to be Peru. MRP has covered issues within Peru’s government and its impact on the country’s critical position in the copper market since 2021. Output growth from its copper mines has become so strangled that Chile may soon be surpassed as the world’s second largest producer. Many projects have been announced to remedy the stagnation in Peruvian copper, but most continue to face delays and red tape.


Related ETN & ETF: iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC), Global X Copper Miners ETF (COPX)

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In May, copper’s spot price gave up all the gains that it accrued since the start of the year, with futures falling to near 7-month lows around $3.50 per pound toward the end of the month. Though prices have regained some ground in the past few days, the London Metal Exchange’s (LME) most recent Commitments of Traders Report indicates investment funds have turned net short of its copper contract for the first time since June 2020. Reuters reports that this balance compounds bearish copper positioning already present in the Chicago Mercantile Exchange’s (CME) contract.


Even as copper stocks on the LME have trended lower, touching a near 18-year low of 51,175 tonnes in April, the metal has been unable to gain its footing. That’s largely due to subdued industrial activity across the world – and particularly in China. A rebound in LME inventories throughout the month of May helped to push copper even lower still. As of April, the International Copper Study Group (ICSG) expected a supply shortfall of 114,000 tonnes this year, a sharp reversal from their October 2022 forecast for an annual surplus of 155,000 tonnes.


A key problem area MRP has flagged for the global supply of copper is Peru – the world’s second largest producer of the metal after its neighbor Chile. Years of political strife devolved into violent unrest in the streets earlier this year, following the removal of President Pedro Castillo, who attempted to consolidate his mandate and evade impeachment by dissolving the country’s congressional body and reorganizing the judiciary. We initially warned that Castillo’s election could be a potential issue for the reliability of Peru’s copper industry all the way back in 2021.


However, Castillo’s recent power grab failed and resulted in his ousting on the same day, but the swearing in of Castillo’s Vice President as the new head of state (the country’s fifth President in five years’ time) was not an acceptable condition to many Peruvians who voiced demands for early elections, which were not granted. In January, roadblocks and invasions of mines by protestors forced work stoppages, putting an estimated 30% of Peru’s copper production at risk. Bloomberg reported in April that Peruvian copper exports fell -20% in the first two months of the year as production climbed, leaving miners with mounting inventory and contributing to tight global supplies.


Per the World Economic Forum, Peru currently produces 10% of all copper supplies and the world is relying on it to expand that output quickly to meet rising demand for its red metal. BloombergNEF estimates appetite for refined copper will grow by 53% by 2040, but mine supply will climb only 16% over the same period. With so much demand in the pipeline, any threat to a meaningful portion of output could set off a significant ripple effect for the longer-term supply-demand balance of copper markets.


At this point, it isn’t even certain that Peru will be the world’s second largest copper producer for much longer. Bloomberg notes that The Democratic Republic of Congo (DRC) could overtake Peru in the next few years – potentially as soon as 2026 or 2027, according to Wood Mackenzie. While Peru has 18 mining projects in its pipeline, only one of those may be developed in the short term, Ruben Arratia, a Wood Mackenzie director, recently noted that, while Peru has 18 mining projects in its pipeline, only one of those may be developed in the short term.


Peru’s government is not only unstable, but it is also unlikely to make mining any easier within the country anytime soon. General elections are not expected this year and are in doubt for 2024. S&P Global notes that the current government is unlikely to loosen environmental requirements for exploration permits, and if parties with more left-wing ideologies expand their hold on government, greater community consultation regarding the use of certain land for mining will likely be implemented, as well as a greater mining canon (taxes paid on mines by companies operating in them).


Potential mine expansions will be key to Peru expanding its copper output throughout the rest of the decade. On May 30, Glencore Plc announced plans to spend $1.5 billion on an expansion project at its Peruvian Antapaccay mine, an upgrade from $590 million when the project was initially announced, meant to extend the mine’s lifespan by decades and reverse significant deterioration in its output. Reuters notes that Antapaccay’s annual yield has fallen steadily from 221,000 tonnes in 2016 to around 150,000 tonnes recently but could rebound to 250,000 tonnes of copper per year after the expansion is complete. That would represent more than 10% of Chile’s 2022 output.


The issue, however, is that the pre-feasibility study for Glencore’s expansion won’t be completed until the second half of 2024, and delays in a new study, as well as permitting, could end up delaying the project even further. This was the case with Chinalco’s $1.3 billion expansion project at the Toromocho copper mine in southern Peru. reports that construction on the project should finally be getting underway by the end of June, five years after it was announced in 2018. That timeline may have been particularly extended by the onset of the COVID-19 pandemic, which shut down copper mines across the South American continent, but it still speaks to the difficulties firms can face while operating in Peru.


Investors can gain exposure to copper via the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC), as well as miners via the Global X Copper Miners ETF (COPX).


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