Less than 12 months after majors BHP (ASX: BHP) and Rio Tinto (ASX: RIO) were touting copper was the commodity of choice, the fickle nature of commodity markets have turned that on its head with copper’s price plunging in recent months prompting Doctor Copper to foresee an imminent economic slowdown – possibly, even recession.
In the last six months, copper’s price has plummeted from almost US$3 per pound (US$6,550/t) to an early September low of US$2.51/lb (US$5,536/t).
However, the metal is yet to reach its global financial crisis bottom of less than US$1.50/lb.
The metal’s languishing price prompted the world’s largest copper producer Chile-based Codelco to report a 74% drop in profits to US$318 million for the first half of 2019 – due to what the company’s former chief executive officer Nelson Pizarro has called an “incredibly challenging” June quarter.
Copper is often looked to as an indicator of global economic health, due to its wide-spread use across most homes and economic sectors.
Its ability to signal economic growth and downturns alike led to the term Doctor Copper.
Copper is the world’s third most consumed metal and is sought for its versatility and conductivity.
Since 2018, copper stockpiles have been eroding – reaching a low of 111,775t in February this year, but weakened demand and sluggish global economic growth has seen levels steadily climb reaching a current level of 330,050t.
According to Office of Chief Economist’s Resources and Energy Quarterly contributor Kate Martin, the falling copper price has been a result of lower Chinese demand, which is by far the largest copper consuming nation – swallowing up more than half of all refined copper produced.
“Copper is fundamentally tied to industrial production and economic growth, so a decrease in world trade and industrial production over the coming years is likely to impact on usage,” Ms Martin noted.
And copper is currently languishing at a time when the world’s largest economy, the US, is facing a possibility of recession in the coming months.
In the US, a recent Federal Reserve Bank indicator revealed the country has slightly more than a 30% chance of facing a recession, with GDP growth forecast to shrink to 1.8% during the September quarter.
When looking at previous recessions and predictions, a recession has resulted once the bank’s probability indicator hit more than 30%.
The country is experiencing a strengthening dollar and declining interest rates and subdued inflation leaving the US Federal Reserve little firing power like slashing rates to stimulate economic growth.
On a global level, the outlook isn’t much better, with the International Monetary Fund reporting growth remains sluggish due to weakened demand resulting from the ongoing US-China trade war.
Global trade also continues to soften, and inflation remains subdued despite central banks’ attempts to lift it.
Weak Australian growth
Meanwhile, back in Australia, Reserve Bank of Australia governor Philip Lowe conceded this week that the country’s economic growth had been “lower than expected” in 1H2019.
The Australian Bureau of Statistics revealed today the Australia economy only grew 0.5% (seasonally adjusted) for the June quarter.
JP Morgan chief economist Sally Auld told Small Caps the market had expected this figure.
Triggering this fall was subdued household spending and a contraction in private investment.
Ms Auld said she anticipated a combination of the RBA’s rate cuts and the Australian Government’s tax rebates would help prop up consumer spending and boost the economy over the remainder of the year.
Is a recession on the cards?
Despite the better outlook for the remainder of the year, Ms Auld did concede an “external shock” could still easily spark a recession for Australia.
Ms Auld said the global climate looks “threatening” and any lift in Australia’s economy could easily be “thwarted” by global events.
She pointed out that although Australia has a history of ducking and weaving to avoid other global recessions, this time, it “may not be so lucky”.
Looking at the US, Ms Auld said JP’s figures point to a greater than 30% likelihood of a recession, but it was actually other parts of the world that have far more worrying economic indicators, including Europe and emerging economies.
Building on Ms Auld’s story, Resources and Energy Quarterly contributor Mark Gibbons said he anticipates the slowdown will continue worldwide throughout the remainder of 2019 – with most countries witnessing leading indicators fall in recent months.
He added this will undoubtedly flow through to commodity markets.
Impact of US-China trade war
US President Donald Trump and Chinese President Xi Jinping’s ongoing trade feud has caused copper and other commodities to be kicked about in recent months.
In BHP’s latest economic and commodity outlook Dr Huw McKay said the ongoing war between US and China was not a recessionary trigger on its own, but it certainly was “unhelpful” towards global expansion.
“We note that the true costs of protectionism, particularly diminished consumer purchasing power, have not yet been fully felt by US households and businesses.”
However, China’s economy has begun to suffer. This can be seen with weaker Chinese demand for copper. Though, it is anticipated the Chinese Government will boost growth throughout the remainder of the year by funnelling some catch-up spending on grid power and other depressed sectors, which consume copper.
Globally, the Office of Chief Economist’s chief economist Mark Cully said the trade disruptions will hit manufacturers especially hard and this will eventually flow through to miners.
Trump recently declared he was hiking existing tariffs on US$250 billion of Chinese imports from 25% to 30% on 1 October, and bumping taxes on a further US$300 billion worth of goods from 10% to 15%.
Mr Cully noted hikes of this nature will force “major changes” to global supply chains.
“The impact will inevitably flow on to the commodity producers who provide the raw materials to manufacturers.”
He pointed out this could have a large effect on nations with high commodity exposure including Australia.
“Our strength – record commodity exports – could also be our vulnerability.”
He also cautioned the global environment for miners can change rapidly.
Commenting on the feud’s direct impact on the copper price, Dr McKay said it would keep copper subdued for the rest of 2019, with an average price of US$6,000/t, and occasional forays below anticipated.
Less bullish on the price, Codelco’s Mr Pizarro said the company forecasts copper will hover between U$2.47/lb and US$2.88/lb in 2019.
Similar to most other analysts, Mr Pizarro said the war would keep the copper market volatile in the short term.
Previous copper fever
Less than 12 months ago, the copper climate was very different. Both BHP and Rio publicly stated they were focusing their exploration efforts on the commodity, due to its promising outlook.
Copper fever kicked-off in late 2017 with rumours Rio had made a major discovery in Western Australia’s Paterson Province.
The rumours were fuelled after Rio boosted its presence in the area from 2,335 square kilometres of wholly owned and joint venture tenements to almost 13,000sq km in late 2017.
Adding flames to the fire were images surfacing of a camp set up with drill rigs and other equipment and infrastructure including a helicopter landing pad.
Meanwhile, Andrew “Twiggy” Forrest’s Fortescue Metals Group (ASX: FMG) also went on a pegging spree in the province increasing its stake from nothing to 5,310sq km that same month.
Speculation was rife and continued till February this year when Rio finally confirmed it had intersected wide intersections of copper mineralisation associated with gold and silver in the region.
Over in South Australia’s Olympic province, BHP was not to be outdone by Rio’s find.
In late November last year, BHP revealed it had pulled out of the ground what some experts have called the thickest high-grade copper intersection seen in many years.
The mining giant had unearthed a 425.7m thick intersection grading 3.04% copper, 0.59 grams per tonne gold, 346 parts per million uranium and 6.03g/t silver.
Within that intersection was a higher-grade 180m interval containing 6.07% copper, 0.92g/t gold and 401ppm and 12.77g/t silver.
The discovery sparked a suite of junior explorers in the area to double their exploration efforts close to the discoveries.
Despite the current global economic and political climate, most analysts are touting a supply deficit will emerge within the copper market in the longer term spurred by falling copper production and increased consumption – primarily in electric vehicle and renewable energy spaces.
BHP’s Dr McKay said he expected a structural deficit for the commodity to open up from early 2020s to mid-2020s.
“Grade decline, resource depletion, increased input costs, water constraints and a scarcity of high–quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to balance the market,” he explained.
Even looking at the market conservatively, Codelco’s Mr Pizzaro agreed, saying the world “definitely” needs more copper.
Leading consumption will be China and emerging Asian countries with global demand predicted to reach about 24Mtpa copper by 2028.
However, looking at current mines and brownfield expansions, Mr Pizzaro predicts around 4Mtpa will be required from new projects to meet this demand and developing all “probable” projects would not even close this gap.
If the electric vehicle revolution takes off as forecast, around 5.2Mtpa of copper will be needed by 2035 for this sector alone, with only 262,000t flowing into it now.
In comparison to a conventional vehicle which requires an average of 20kg of copper, a battery-powered electric vehicle consumes about 80kg of copper.
As well as electric vehicles, renewable energies like wind and solar also require more copper with this sector anticipated to underpin consumption even more.