CBA: Watch Chile and Peru for clues to the global copper supply outlook
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ASX small cap copper plays are operating in an ideal macro environment as the copper price holds near decade highs.
In recent research, CBA analyst Vivek Dhar highlighted five reasons why it could stay there, starting with robust Chinese demand and the prevalence of copper in clean energy solutions.
Since May 11, prices have eased back from the US$10,000/tonne level ($4.50/lb).
This week, Dhar provided an update and said prices are “likely to ease” through the second half of the year.
However, copper investors shouldn’t worry about a major re-rating anytime soon.
As the consumer of “55-60%” of the world’s copper, the China demand story is still central to the price outlook, Dhar said.
There are a couple of indicators Chinese demand might ease back slightly — but not by much.
In addition, Dhar assessed some interesting developments in Chile and Peru, which together account for almost 40% of global copper supply.
In Chile, which accounts for around 25% of global copper supply, the lower house of parliament has passed an opposition-led bill which, if approved, “could see progressive taxes applied on the country’s copper sales from 2024”.
The incumbent government has claimed that larger copper producers could be subject to a tax burden of more than 80%, Dhar said.
Such stringent tax collection measures could potentially delay new output, although the total tax burden would be more like 55% if an existing tax rule is replaced.
But even that tax rate is “still higher than most other jurisdictions”, Dhar said.
A similar situation is playing out in Peru, which accounts for around 13 per cent of global copper supply.
After general elections on April 11, a run-off between the two leading candidates is scheduled for June 6.
And leading candidate Pedro Castillo recently added a copper tax as part of his campaign, in addition to his pledge to nationalise a major gas field.
While it’s possible that neither development will play out, potential disruptions from one of the world’s major copper hubs will be worth watching in the second half of the year.
Especially given the fact that with “only 3 years’ worth of copper demand growth in the copper supply pipeline, there are also longer term concerns surrounding copper supply”, Dhar said.
Back on the demand side (i.e. China), Dhar noted that commodity price speculation has come under increased scrutiny by Chinese policymakers, with iron ore dropping back below US$200/t.
In addition, copper demand concerns “are lifting in China as the country’s credit impulse looks to have peaked,” he said.
“A falling credit impulse in China usually means a fall in raw material prices.”
More broadly though, industrial production is tracking strongly amid the post-COVID economic rebound — and that’s not just a China story.
While Chinese industrial production is already 20% higher than what it was before the pandemic, activity levels in South Korea and India are also tracking above pre-COVID levels.
Production levels in major economies across Europe, the US and Japan are also rising.
In that context, Dhar said it’s not implausible that ex-China copper demand will outweigh any slowdown on the Chinese mainland.
As a result, “we see upside risks to our copper price forecast of $US3.60/lbin Q4 2021”, Dhar said.