It was supposed to be a difficult year for copper, with prices declining 25% to a low of US$4618/tonne ($6332.46) on March 23 due to weak demand from Covid-19. Yet June and July have seen an unexpectedly strong rebound in copper prices, with the commodity experiencing a 42% growth to US$6,545/tonne on July 13.
“The dramatic price rally was backed by improved outlook for demand, especially in China, concerns over supply from mine operation disruptions due to COVID-19, and ample liquidity in the market, amid a low-interest rate environment and weak US$,” write DBS analyst Lee Eun in a broker’s report published on August 5
While demand will still likely decline by 2.4% y-o-y for 2020 due to a global demand slump, the silver lining is an anticipated 3.4% y-o-y rebound in 2021. Lee sees a flattish recovery for China’s copper demand following a faster-than-expected recovery of auto sales and government stimulus measures.
Strong electric vehicle growth (EV) -- with support from the Chinese and EU governments -- will be a long-run driver of demand growth for copper. In particular, new infrastructure investment like 5G network infrastructure and charging stations for EVs in China will drive long-term demand for copper going forward.
Mined copper output in 2020 is likely to decline in 2020, but Lee believes that 2021 should see a return to growth. A surplus of about 199,000 tonnes is expected in 2020 relative to a 199,000 tonne deficit in 2019 due to demand contraction, but this will be smaller than initial estimates because of supply disruptions in major mines in South America and the quicker than expected economic turnaround in China.
Refined copper production will moreover likely decline marginally by 0.7% in 2020, with the resilience of Chinese refined metal production during the country’s lockdown balancing production decline outside China. Mined and refined copper supply is likely to grow by 3.5% and 2.7% respectively next year to create a balanced market.
Copper prices will likely be propped up by weak inventory against the context of low market demand, with London Metal Exchange prices seen to average US$5,670/tonne, down 5.5% y-o-y, in 2020, before rising 5.1% y-o-y to US$5,960/tonne in 2021. Emerging EV demand and higher exploration and production costs should see prices rise to around US$7,000/tonne levels over the long term should a second wave of Covid-19 be averted.
Lee therefore reports an increase in target prices for the copper stocks covered by DBS research, indicating a higher earnings forecast following an 8% increase in copper price forecasts for 2020. Her top pick is Zijin Mining’s H-share, raising the Hong Kong-listed counter’s target price to HK$5.10 ($0.90). The stock, she argues, will gain from strong copper and gold prices on the back of aggressive resource expansion, issuing a “buy” call on the counter.
The DBS analyst has also raised her target price on Zijin Mining’s China-listed A share to RMB 5.80 ($1.14), though she downgrades its call from “buy” to “hold” due to limited upside following a recent share price rally. She has also raided the target price for MMG-limited to HK$2.10, though her “hold” call remains constant after pricing in higher metal prices as well as uncertainty in its Las Bambas Operations in South America.
As at 2.46pm, Zijin Mining’s H-share is trading 0.18 points up at HK$4.93 with a price-to-earnings (P/E) ratio of 23.73. Zijin Mining’s A-share is trading 0.23 points up at RMB6.02 with a price-to-earnings (P/E) ratio of 32.20. MMG Limited is trading at 0.02 points down at HK$2.05.
