Copper: Demand shock does not change the supply narrative

Under the impact of U.S. tariffs, the uncertainty of the global economic outlook has significantly increased, and recently, copper prices are facing considerable downward pressure. For the global copper market, the supply constraints due to insufficient capital expenditure have not yet materialized, while the global demand shock brought about by U.S. trade policies has already arrived. The market is beginning to worry whether the narrative of long-term copper supply shortages can continue to hold.

This article aims to provide some certainty for the currently chaotic market expectations by sorting out the future capacity of copper mines. In the short term, we are mainly concerned with the pace of copper mine capacity release, which often deviates from expectations due to factors such as geological conditions, local political stability, and company strategies. In the long term, we focus on the total supply of baseline scenario projects. This involves the distinction between short-term and long-term bulk balance sheets; short-term mismatches in supply and demand lead to price fluctuations, where price is a function of relative supply and demand balance. However, from a long-term perspective, under the price mechanism, the trends of supply and demand must align. Therefore, we pay more attention to the difference between "baseline supply" and demand, which we define as "incentive supply" to correspond with baseline supply, differing in that this portion is a function of price. If baseline supply is less than expected demand, the price incentive mechanism will stimulate sufficient marginal supply to meet demand, and vice versa. This is the main logic behind our long-term price judgment. Common cognitive biases and expectation discrepancies regarding copper mine supply in the market often arise from blurring the lines between pace and total volume, and confusing short-term and long-term balance sheets.

From the perspective of pace, copper mine supply exhibits characteristics of short-term underperformance, medium-term potential release pressure, and long-term "peak" delays.

In the short term, we have revised up the growth rate of copper concentrate supply for 2024 and revised down for 2025. According to ICSG statistics, global copper mine actual output in 2024 is expected to be 19.57 million tons, a year-on-year increase of 3.2%. The copper mine disruption rate is 5.8%, which, although higher than the ten-year average of 5.1%, is still below previous market expectations. We believe this is mainly due to: 1) the smooth ramp-up of Chinese-funded copper mines in the Democratic Republic of the Congo, leading to higher-than-expected global copper concentrate output in the second half of the year; 2) the high disruption rate of Latin American copper mines has decreased in the second half of the year. Among them, the ramp-up progress of QB2 is faster than expected, and the operational efficiency of Las Bambas has improved, with output exceeding the upper guidance.

Chart: In January, global copper concentrate output increased by 3.2% year-on-year.

Source: ICSG, CICC Research Department

Chart: From January to March, the cumulative year-on-year growth rate of domestic refined copper output is 9.4%.

Source: SMM, CICC Research Department

Chart: The copper mine disruption rate in 2024 is at a historically high level

Source: Woodmac, CICC Research Department

For 2025, we expect copper mine supply to likely be lower than the expectations given at the end of last year. We anticipate that this year's increment will mainly come from the ramp-up of production from projects that commenced operations in 2024, while there are fewer new projects coming online. Regarding disruption rates, we believe: 1) 2025 is a significant year for labor negotiations in mines, which may cause some disturbances; 2) The impact of declining mineral quality and water resource shortages in South America continues, and the proportion of incremental projects in South America is relatively high in 2025. We expect the disruption rate for copper mines may increase. We forecast that the annual growth rate of copper mines in 2025 may decrease from the previous expectation of 2.4% to 1.8%, corresponding to an increment of 340,000 tons.

Specifically, projects with upward adjustments in incremental expectations for 2025 include: 1) Kamoa-Kakula announced a copper production of 133,000 tons for Q1 2025, which annualizes to nearly 520,000-580,000 tons at the lower end of the production guidance. However, according to Ivanhoe's quarterly report, due to a significant increase in imported hydropower supply in March, the annualized copper mine production significantly increased in the two weeks after March, exceeding the upper limit of the production guidance of 580,000 tons. We expect that after the upgrade of the fifth turbine unit of the 2Q Yingjia Phase II hydropower station is completed, the power constraints will be effectively resolved, leading to a significant increase in copper mine production, with an expected annual production increase of 120,000 tons. Projects with unchanged incremental expectations include: 1) Chile's QB2 and Mantoverde are expected to reach production smoothly, and we believe they can contribute an increment of 50,000 tons each within the year. 2) The Kansanshi copper mine Phase III is expected to be completed in 2H2025, contributing an increment of 30,000 tons. 3) The Rajo Inca project has been completed, transforming the Salvador copper mine from a combined open-pit and underground mine to an open-pit mine, expected to contribute an increment of 30,000 tons of capacity. Projects with downward adjustments in incremental expectations include: 1) Malmyzhskoye is constrained by labor shortages, and the production progress is below expectations, with an expected copper production of only 30,000 tons in 2025. 2) The Collahuasi mine is in a transitional state between different phases, and due to declining ore grades and reduced copper recovery rates, production is expected to decline by 120,000 tons.

Regarding refined copper supply, we expect this year's refined copper production growth rate to converge with the copper mine supply growth rate. Supply data from 1985 to the present shows that the growth rate at the smelting/refining end generally lags behind that of copper concentrate by about a year, which may be due to copper concentrate inventories providing a certain buffer. In the long term, both tend to maintain the same trend. We expect that overseas smelters with higher costs and more flexible production reduction decisions will be the first to cut production this year. The tightening expectations for scrap copper supply also bring more pressure to copper element supply.

Chart: Smelting output growth generally lags behind mine output by 1 year

Source: Woodmac, CICC Research Department

From a mid-term perspective, we need to pay attention to the potential pressure brought by the delayed project concentration release or the accelerated ramp-up of projects. Standing at the point of 2024, the market was once worried about the pressure of concentrated capacity release being delayed until 2025, which is why third-party market institutions like WoodMac have given relatively high supply forecasts for 2025. However, as we enter 2025, the supply situation gradually becomes clearer, and while the market is lowering its expectations for the growth rate of copper mine supply in 2025, the concerns about the pressure of delayed project releases have once again "shifted" to the following year. For example, according to WoodMac data, the latest 2Q outlook report forecasts a copper mine growth rate of 5.4% for 2026. The increment mainly comes from the production increase of existing projects, including the expansion of Kamoa-Kakula and TFM in the Democratic Republic of the Congo, the ramp-up of Malmyzhskoye in Russia, and the ramp-up of Collahuasi and QB2 in Chile. Additionally, the resumption of operations at the Cobre copper mine in Panama after the resolution of disputes may also bring further risks of easing copper mine supply.

The slow release of near-term copper mine supply has continuously delayed the theoretical peak time point for long-term supply. We currently expect the benchmark copper mine supply to peak in 2028, while last year's general forecast was for a peak in 2027. However, the delay in the peak time point does not mean that the supply narrative will be late; the continuous underperformance of copper mine capacity is essentially an expression of long-term supply inadequacy in the present. The historical underinvestment in capital expenditures has led to a lack of copper mine project flows, which remains a relatively certain issue. The decline in grades of existing mines and the intensification of resource protectionism have also supported the copper mine disruption rate being at a high level since 2016. Therefore, we believe that the elongation of the peak path will not change the endpoint.

Chart: Global copper mine expansion capital expenditures still appear insufficient

Source: WoodMac, Company Research Department

Chart: The grade of processed copper mines declines year by year

Source: Woodmac, CICC Research Department

From a total perspective, copper mine supply still struggles to meet demand increments, and price mechanisms need to intervene to match supply and demand

From a total perspective, we expect that by 2028, the remaining incremental total at the mine end under the benchmark scenario will be 2.3 million tons, equivalent to an average annual increment of 570,000 tons. The large projects yet to be put into production are only Malmyzhskoye, Almalyk II, Reko Diq, Phase II of the Giant Dragon, and Grasberg Kucing Liar, with the average project scale significantly declining compared to the previous supply peak If we calculate the CAGR growth rate for the next few years with 2028 as the peak point, it is approximately 2.7%. On the demand side, we believe that copper, as a macro commodity, will maintain a long-term demand alignment with the macro economy. The IMF predicts that the global GDP CAGR from 2023 to 2028 will be 2.8%. We must also note that, thanks to the continuous improvement in global electrification, the elasticity of global copper consumption growth compared to GDP growth over the past three years has been greater than 1, and we believe this trend is likely to continue in the future. This also means that in the coming years, the growth rate of supply from the mining sector may struggle to match the growth in demand. In the current context of fluctuating trade policies and unstable economic expectations, short-term copper demand expectations have also shifted to non-linear fluctuations, leading to increased price volatility. Although the short-term supply-demand rhythm faces uncertainty, we believe that the long-term supply constraint narrative remains valid; in other words, the issue with copper mine supply is one of pathways, not total volume.

Chart: Limited project increments before 2028, and a lack of large projects

Source: ICSG, Company Research Department

As mentioned earlier, the supply-demand balance in the baseline scenario only provides a theoretical supply-demand gap; in reality, we may never see the peak of copper mine supply (unless demand for copper peaks). The anticipated gap will drive copper prices up, and the probability of projects outside the baseline scenario being put into production will also correspondingly increase. According to WoodMac data, among the potential projects before 2028, larger ones include Russia's Udokan Phase II, Serbia's Timok Phase 2, Argentina's Josemaria, and Chile's Vizcachitas. According to WoodMac's forecast, the baseline supply-demand gap for copper mines in 2028 is about 530,000 tons, which will expand year by year, accumulating approximately 5.5 million tons from 2025 to 2030. Based on the incentive price curve assuming a 15% IRR, the corresponding copper price for this "incentive supply" is about $11,000 per ton.

Chart: Gradual expansion of the supply gap in the baseline scenario over the next five years

Source: WoodMac, Company Research Department

Chart: Copper mine incentive prices

Source: WoodMac, CICC Research Department

In summary, the short-term demand shock for copper does not change its long-term supply narrative

In the short term, we believe that the distortion of global economic growth expectations caused by U.S. trade policy shocks will amplify copper price volatility. The macroeconomic team at China International Capital Corporation (CICC) estimates that the current tariff policy will impact U.S. GDP growth by about 1.4 percentage points by 2025. Based on the current announced tariff volumes, we estimate that global copper demand growth may face a loss risk of 1.8 percentage points in extreme scenarios, with refined copper surplus potentially expanding to 600,000 tons. Considering domestic policy responses and demand elasticity, we believe that the overall impact on copper demand growth is about 1 percentage point. From the bottom support indicated by the cost-premium system, if tariff risks do not escalate further, we believe that copper prices can maintain a premium of over 20% compared to the 90th percentile C1 cash cost + maintenance capital expenditure (USD 6,700/ton), which is USD 8,000/ton. In the long term, the demand increment contributed by electrification will continue to drive copper demand growth. Meanwhile, as the incremental supply in the baseline scenario gradually depletes, supply constraints will gradually become apparent, and we remain confident in the long-term upward shift of the copper price center.

Authors: Wang Zhilv, Zhao Xuan, Guo Chaohui, Source: CICC Commodities, Original Title: "CICC Commodities | Copper: Demand Shock Does Not Change Supply Narrative"

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