by Rodrigo Scolaro, economist at Costdrivers
Copper prices stabilized on the international market this week after the release of Chinese trade balance data – analysts had expected May exports to be 32,2% – versus the recorded figure of 27,9%. In addition, imports of refined copper and copper products by its largest global consumer fell 8% month-on-month – for the second consecutive period.
Still, of course, China is still the largest importer of copper – with Chinese exports still slowly increasing, net imports have started to decline. In addition, there has also been resistance to rising prices, with manufacturers scaling back operations – as many Chinese producers have ended up bearing the brunt of the price hike.
However, this drop in prices may only be temporary. Even with the drop, the price is still far from the highs recorded previously – which may indicate that we are facing a super cycle for the metal. Analyses carried out by experts over the last 120 years clearly show that we are facing a possible period in which prices may even rise further. There are numerous causes, and some other factors, which are not always discussed so openly by the market, may play a crucial role.
One of these aspects is the depletion of reserves. A report by Goehring & Rozencwajg, released this year, indicates that both ore reserves and the quality of the extracted metal are in sharp decline. Added to this are “paper reserves” – a subject little discussed in the industry – which is when metal producers increase their reserves with a simple maneuver – mining the best quality metal first – and reducing these cut-off grades when prices rise.
Another point of concern is the political turmoil in South America, especially in Peru and Chile, major producers of non-ferrous metals, especially copper. Although it is still too early to say what impact the Peruvian elections or the new Chilean constitution will have on the sector, uncertainty helps to keep metal prices high.
The Goehring & Rozencwajg report also noted that new copper discoveries have slowed dramatically over the past decade – which is bound to drive up prices in the coming years.
Aluminum is it a threat?
Copper is the leading metal par excellence in terms of electrical conductivity, but it is not the only solution for power transmission. Although aluminum's conductivity is about 30% lower than that of copper, some analysts see a growing shift towards the metals as a cheaper option. This scenario could help offset demand in the Brazilian market, as exports may encounter some resistance in the coming months, with some tariffs on imports still being analyzed by the Joe Biden administration.
In fact, because of its lower cost, aluminum beats copper in almost any realistic long-term price scenario. The only downside to aluminum is the higher carbon footprint of aluminum—but compared to current copper prices, the prices are competitive.
The demand for a green economy, the main banner of the current US government, should also help to raise the prices of social commodities of clean and recyclable energy, mainly due to the issue of vehicle electrification, which drives demand for nickel, zinc, aluminum and copper, impacting the trade balance.
Although there has been an increase in aluminum consumption—as well as prices—in the global market, we are still far from considering large-scale substitution.
At the end of 2020, the price of copper reached approximately US$ 7.750/mt (per thousand tons) on the international market, while aluminum was US$ 2.000/mt. In 2021, prices reached approximately US$ 10.200/mt and US$ 2.400/mt in May for copper and aluminum, respectively, with prices expected to remain stable if there are no major changes in the market, but still above average. The year-to-date price should reach approximately US$ 10.500/mt for copper and US$ 2.500/mt for aluminum.
Considering that Brazil is highly dependent on exports, rising prices could represent an obstacle to future negotiations. Salvation would necessarily involve the recovery of the economy and vaccination of the population, which would also increase the level of production and new investments, thus balancing supply and demand.