Ground Breakers: Copper slide ‘momentary’ says eternal bull Robert Friedland. He prefers ‘supply crisis’
Link copied to
Robert Friedland, never one to push his own barrow, has taken aim at bears who think China is heading into an economic slowdown.
Copper prices fell below US$8000/t yesterday, with the red metal’s delicate trapeze act above the mark coming to an end as Chinese property data brought pain for industrial metals and iron ore.
It had soared to as high as US$10,700/t three times between May 2021 and April 2022 before China’s Covid Zero policy and failure to rebound from its property sector woes sent the market on a slide.
The current price is also way off estimates from copper long investment giant Goldman Sachs, which estimates now nearly impossible average copper prices of US$9750/t for this quarter, U$9900/t in Q3 and US$10,000/t in Q4, rising to US$10,125/t in 2024, US$10,800/t in 2025 and US$10,757/t in 2026.
GS’ nominal long term price clocks in at US$11,013/t or US$5/lb, something that would be an all time high, though it thinks inflation means that will only equate to US$9800/t and US$4.31/lb in real terms.
Friedland, the mining entrepreneur who found the Voisey’s Bay nickel field in Canada before making two of the world’s largest copper discoveries of the 21st century at Oyu Tolgoi in Mongolia and Kamoa-Kakula in the DRC, told Bloomberg TV at the Qatar Economic Forum yesterday that China would rebound while the world faces a copper supply ‘crisis’.
“It’s momentary. The world’s worried about the US budget crisis and there’s all kinds of worries about recession, rates have been rising worldwide,” the Ivanhoe Mines chairman said.
“But we take the long term view on copper and we’re very, very bullish on demand. I just came from Beijing, I think the mood there is good.”
While China’s poor economic data has been the primary cause for concern in the copper investment market, with short bets on the CME now exceeding longs and China’s refined copper imports down 16% YoY in the March quarter to 700,000t.
But Friedland says Beijing has scope other capitals don’t to ease off on interest rates to stimulate its economy.
“Yes, I do because they have virtually no domestic inflation,” he remarked.
“So they’ve got room to raise to lower rates. And I think you’ll see stimulation in the second half.”
Long term Friedland says the world is boned when it comes to finding new sources of the metal, which is expected to see demand balloon from the rollout of renewables, electric vehicles and other green energy technologies.
“We’re facing a crisis for finding enough copper,” he said.
“We think we need to mine as much copper in the next 25 years than has been mined in all of human history if we’re to have any, any possibility of having the energy transition we all desire.
“It’s very important to understand that mines take 10 years or 15 years to build, it’s not supply that you can turn on.
“So we’re seeing a relatively low price of copper, simply because we’re breaking down the integrated world economy.
“And we see a situation where we really have a crisis of supply, not of demand, we’re suppressing demand by raising interest rates, but long term supply is definitely a constraint.”
If there are any demand concerns it could come from a shift to a denser low voltage system from 12V to 48V by Elon Musk’s Tesla.
He told investors at a shareholder meeting this month a Tesla which currently uses over 80kg of copper could carve that requirement to a quarter, the same as an internal combustion engine vehicle.
“First approximation, that means we need only about a quarter as much copper in the car as would be needed for a 12V battery, so that’s a big deal because people often worry about whether there is enough copper,” Musk said.
“Yes, there is.”
It’s a line he’s trotted out before.
Miners and mining experts don’t necessarily agree. Friedland says military demand is also on the rise, with urbanisation in India and Africa equally a driving force for long-term demand for copper, nickel, cobalt, vanadium and scandium (mostly, funnily enough, metals his companies happen to be involved in.)
Even without a major surge in demand from EVs, the other problem for miners is the same ESG themes that are spurring the desire to shift from fossil fuels to renewables are also making mine approvals longer and more stringent, with local communities and traditional owners gaining a larger say in the process.
Tier-1 mines, which Friedland classes as those with 50-100 year mine lives, are also getting older, deeper and less productive.
Friedland says higher interest rates have also made it harder to raise capital to invest in exploration and development.
“It means it’s harder to raise capital to go out and develop a mine which implies again, more metal shortages,” he said.
“It’s harder and harder to build a Tier-1 mine, a Tier-1 mine is one that’s big enough to run for 50 or 100 years and have a real impact on supply-demand fundamentals.
“You know the great mines in the world in Chile are over 100 years old and they’re in terminal decline. Their grades are declining. Codelco (Chile’s state owned copper miner) has been unable to raise production in Chile in the last 10 years.
“So we need a new generation of mines. We need new technology. We need a better way to do things.”
In one positive development for copper production in Chile, a new royalty bill will come into force from the start of next year which will cap the effective tax rate at 46.5%.
Currently miners are exposed to tax rates of well over 50% in Chile, with the new legislation bringing the South American nation, the world’s largest copper producer, into line with competing jurisdictions like Argentina, Australia, Canada and Peru, according to Goldman Sachs analysts Paul Young, Emily Chieng, Caleb Heiner and Srishti Goyal.
They see the bill making a string of new expansions more likely, including BHP’s (ASX:BHP) concentrator and leach expansions at Escondida (also partly owned by Rio Tinto (ASX:RIO)) and Spence along with a sulphide concentrator at Cerro Colorado, Freeport’s 300,000tpa El Abra expansion, Teck’s Quebrada Blanca Milling Expansion and a fourth mill line at South32’s (ASX:S32) 45% owned Sierra Gorda.
Escondida is the world’s largest copper producing mine with production in the vicinity of 1Mtpa, and Young et. al. say the new tax bill could cut 8% to BHP’s forecast earnings per share from FY25 on its long term copper price expectations and 3% for Rio Tinto.
Escondida’s tax stability agreement ends this year.
South32 won’t see an impact until FY29 after its tax stability agreement rolls, but GS thinks the new royalty deal will make future investments more certain.
Goldman has buy ratings on each of BHP, Rio and South32.