I. Sector landscape and outlook

Copper is one of the major contributors to the global economy. ‘Doctor Copper’ is a term often used to detect the global economic pulse to assess the health of the economy. It is more than just a mined metal; it is a vital, positive contributor to humankind and has improved quality of life. The copper industry is considered by many countries as an essential sector as it is used in the manufacturing chain of vital products such as medical equipment, electric/power cables, tubes, wires, mobile phones, computers, refrigerators, air-conditioning, cars, among others. However, copper prices witnessed large swings over the last two years, after a decent increase in 2016 and 2017, copper prices peaked in 2018 and began to decline. A big factor here is the trade rifts started between the U.S. and China in 2018. Prices recovered somewhat in early 2019 when it appeared that a trade deal was being worked on to settle the dispute. Copper prices fell again in May 2019 when the trade escalation intensified with more tariffs. Prices rallied towards the end of 2019 when it became clear that a Phase-I was imminent. Copper prices dropped once more when China reported the outbreak of the novel coronavirus. Copper prices hit another low when parts of the U.S. went into lockdown in March due to COVID-19. But prices have since rallied and are inching higher despite the continued presence of a global pandemic.

Fig 1: Refined Copper distribution worldwide in 2019, by region.


Source: Statista 

COVID-19 Pandemic Impact on the Global Copper Industry

In January and February 2020 all eyes were turned to China, and especially Wuhan, where a novel coronavirus seemed to be spreading quickly among the population. The world looked at the total lockdown of a city of about eleven million people but did not imagine that within two months, a similar situation would occur in the rest of the world. The global lockdown imposed to protect the health of the population, which resulted in an unprecedented economic and social crisis, different from the 2008-2009 global financial crisis or any past crisis. The current crisis is affecting almost all the sectors of the economy (industry, commodity markets, tourism, accommodation/restaurants, transport/logistics, aviation, arts/entertainment, construction, real estate, among others) due to the mandatory confinement of the population and shutdown of non-essential businesses.

The COVID-19 pandemic poses an unprecedented challenge for the copper industry. As responsible operators, companies have been engaging with relevant authorities to comply with sanitary and government regulations while ensuring the safety and health of the workers, reorganising operating plans, preserving cash-flow, reducing capital and exploration expenditure, restructuring workforces and supporting local communities.

The extent to which each country’s copper industry has been impacted is largely dependent on the health rules imposed by the authorities (confinement, travel restrictions, social distancing, etc.) and also on the decisions taken by governments to consider, or not, the mining/metals industry as a strategic sector of the economy. In certain countries, the mining and metals industry was considered an essential sector and could operate (respecting sanitary and health regulations). Examples include the United States, Chile, and Australia. However, in other countries, the copper industry had to shut down, as in Panama, or was only allowed to operate at reduced levels.

As a matter of fact, copper was one of the hardest hits with prices falling a notable 27 per cent over late January and mid-March to below US$ 4,700/tonne, the lowest level in the last four year. However, since March 23, when copper prices touched the lowest level of US$ 4617.6/tonne, Copper prices are now up by ~ 39% to US$ 6414.2/ tonne (on July 24, 2020, latest data available on the London Metal Exchange).

Fig 2: Copper 4-year Spot Price Chart


Source: London Metal Exchange (LME)

Copper Production (Jan – Apr)

According to the latest data from The International Copper Study Group (ICSG) released for April 2020, worlds copper mine production remained essentially unchanged in the first four months of 2020, with concentrate production declining by 0.5% and solvent extraction-electrowinning (SX-EW) increasing by 1%. In Peru, stoppages resulting from COVID-19 pandemic, combined with operational issues and adverse weather affecting a few major mines, led to a 17% decline in mine production over the first four months with April recording a decline of 33%. Mine production in Chile, the world’s biggest copper mine producing country increased by 3.8% recovering from production constraints in early 2019. COVID-19 impact on Chilean output was minor at the beginning of the pandemic. In the Democratic Republic of Congo (DRC), mine production increased by 3.5% as output from ramp-up mines more than offset the temporary closure of the Mutanda mine in December 2019. Official data indicates that Chinese copper mine production declined by 1% mainly due to the temporary suspension of output at a number of mines due to COVID-19 related restrictions.
 
Fig 3: World refined copper usage and supply trend


Source: ICSG
 

Further, the preliminary data, indicates that world refined copper production remained essentially unchanged during the first four months of 2020 with primary production (electrolytic and electrowinning) up by 2% and secondary production (from the scrap) down by 8%. Chilean electrolytic refined output increased by 36% as production in the comparative period of 2019 was negatively affected by temporary smelter shutdowns whilst undergoing upgrades to comply with new environmental regulations. Total Chilean refined copper production (including Electrowinning) increased by 11%. Chinese refined production was negatively impacted by temporary shutdowns related to COVID-19 restrictions, tight scrap supply and constraints associated with oversupply in the sulphuric acid market during the early part of the year. In Africa, refined products in the DRC was up 2%, but production in Zambia declined by 13% due to operational issues and temporary shutdowns. Indian output is estimated to have declined by 20% over the first four months primarily because of the suspension of Birla Copper’s operations at the end of March following a national lockdown due to COVID-19. Japanese refined production increased by 5% mainly because maintenances negatively affected output during the same period of 2019. 
 
Trends and Opportunities for Copper

Fig 4: Demand drivers for copper


Source: Kalkine
 

1. Population growth, urbanisation and increased wealth mean more building construction and greater building density, and building wires are key part of this.

2. Growth in infrastructure and electrification are good for electrical equipment sales in general – here we refer growth in key electric motor and transformer sectors.

3. Then there are the markets that specifically benefit from society megatrends – here we refer electric vehicles, Li-ion batteries, and renewables generation.
 

Risk Associated with Copper Industry

The COVID-19 pandemic poses an unprecedented challenge for the copper industry. Copper usage is closely linked to world economic growth, and the COVID-19 led global lockdown is significantly constraining all sectors of the economy. IMF suggests that the global economy will contract sharply by 3% in 2020, an outcome far worse than during the 2008-09 financial crisis. Also, local lockdown announced in many geographies could also have a weigh on the Copper demand. The performance of copper supply and demand remains related to the length of the current local lockdown announced in many geographies, the magnitude of the impact on the global economy, the pace of recovery of economic activity, the support and stimulus packages given by Governments, the performance of commodities and financial markets, the populations' ability to return to its pre-Covid19 lifestyle and consumption habits -consumer confidence. Further, a second wave of the novel virus would dent the demand and prices of the commodity.

Outlook

The copper industry is resilient, and we believe that the industry will adapt to and overcome these difficult times with the support of governments. Although the short-term outlook for copper is challenging and dependent on the numerous factors described above, the medium and long-term outlook remains positive as copper is essential to modern life and contributes to a sustainable world. Copper prices gained approximately 39% per cent from the year lows as the demand started to pick up. China, one of the world's largest consumer of copper, has opened its economy and allowed the economic and industrial activities to resume, which is supporting the copper demand. Further, copper prices are likely to remain stable in the second half of the year as most of the governments across the globe easing the lockdown restrictions which is likely to result in the resumption of the industrial activities. Further, copper is an important contributor to the economies of mature, newly developed and developing countries. Mining, processing, recycling, and the transformation of metal into a multitude of products creates jobs and generates wealth. These activities contribute to building and maintaining a country's infrastructure and create trade and investment opportunities. The gradual shift towards cleaner energy and electric vehicles, which are more copper intensive should also boost usage over the decade.
 
 
II. Investment theme and stocks under discussion (AAL, CAML, KAZ and ATYM)

After understanding the recent trends in the industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow.