Renewable energy to drive copper demand, says BMO

8th June 2018
Resources Rising Stars

Copper has one of the best longer-term fundamentals among commodity markets, according to BMO Capital Markets, prompting the global broker to lift its long-term copper price forecast by 7% to US$3.25/lb.

BMO says the upgrade reflects its “increased confidence and positive view on copper”, advising investors to “accumulate shares in companies with growing copper production and improving balance sheets”.

“Based on our thorough analysis of long-term demand, supply and incentive pricing, we have raised our long-term copper price forecast to US$3.25/lb (from US$3.05/lb), above the consensus real long-term price of US$2.95/lb,” BMO said.

BMO says renewable energy infrastructure is the biggest single driver of global demand growth for copper over the coming years, with the need to connect significant numbers of small-scale electricity generation units into the grid providing “a major boost” to copper – with solar generation capacity set to triple and wind capacity double by 2025.

“We expect copper demand growth rates through to 2030 at above 3% compound annual growth rate,” BMO said.

“Changing long-run commodity prices should be a rare event and should only take place where there is a marked shift in the future outlook,” it says.

“In our view, the growth trend in copper demand owing to a combination of rising renewable energy forecasts and increased consumption in the automotive sector as the electric vehicle trend accelerates is such an event.

“Importantly, these are global trends rather than China-specific ones, with these sectors adding ~6Mt of copper demand by 2025.”

BMO says a copper price above current levels is required to incentivise new production with the copper project pipeline “thin” compared to history.

“The current probably and highly probable copper pipeline is currently the lowest we have seen this century, both in terms of number of projects and capacity,” it said.

“Recent years have seen both cancellation and delivery of potential projects, and both of which have served to reduce the list and shorten the x-axis on our incentive price curve. We see the need for ~5Mt of new projects from new primary mine supply to bring the market into equilibrium over the 2025-203 period.”

BMO forecasts that the copper market will move into a significant deficit over the 2019-20 period, owing to lack of supply growth.

While most of the copper stocks covered by BMO are major North American companies such as First Quantum, Teck and Ivanhoe, local copper stocks like Sandfire Resources (ASX: SFR) benefited from the bullish sentiment towards copper (and a rising price for the red metal) during the week.

Sandfire hit a record high of $9.31 during the week, capitalising the debt-free producer at nearly $1.5 billion.


Image via The Wall Street Journal

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