Mine supply down, refined supply up

 

Copper prices have risen remarkably in recent weeks and they are now up 20% YoY and 9.1% YTD. This was driven by a confluence of factors. The rally was initially triggered by a sharp rebound of demand in China, where changes in consumption have flipped from a contraction of 37% YoY in February to an expansion of 24.2% in May, a swing of 61.2ppt! This helped to prevent an increase of inventories, with market tightness then exacerbated by supply outages. Linked to that, global mine supply has contracted between March and April, which led to shortages in the concentrates market, reflected in lower treatment and refining charges.

 

BHP highlights the ongoing headwinds

 

Digging deeper into mining activity, producers especially in Chile have operated with fewer staff on site. This has had various implications. Most notably, essential tasks, including pre-stripping, were deferred, while throughput was maximised. This was perhaps most impressively visible in BHP's quarterly results, with the company outlining that the production of payable copper at Escondida increased by 3.8% QoQ in 2Q20, while tonnages of material mined dropped by 30% QoQ. Going forward, the company guides that volumes are 'expected to be slightly lower in the 2021 financial year due to impacts from a reduction in operational workforces in copper in response to COVID-19'.

 

Activity normalising, but challenges remain

 

Ultimately, there is a causal link between mined and refined supply. Hence, against the ongoing headwinds to mine production, there is a risk to the sustainability of global refined production increases of 2.5% in May. Changing tack slightly, baseline mine supply growth has fallen steadily in recent years, with concentrates production in 2020 hovering more or less at the same levels than in 2016. While output should rebound next year, we remain concerned that unexpected losses may increase as miners especially in Chile have had only essential staff on site in recent months. Linked to that, we have factored in the usual disruption allowance of 6% for 2021, which implies a deficit of 188Kt; yet, there is a risk that the shortages may end up being much bigger.