Analyst Says Current Company Valuations, Prices Unfavorable for Increasing Copper Production

The International Energy Agency predicted in its 2017 World Energy Outlook that by 2040, China may have exceeded the European Union’s energy consumption. In the report, the agency stated that electricity was the rising force among global end uses of energy, noting that it would make up 40% of the increase in final consumption by 2040. To help produce and distribute electricity in this new world, a recyclable and durable metal that possessed good electrical conduction properties would be needed.

This is why many expect that as the world enters a new era of technological innovation and international industrialization, the demand for copper will increase significantly. In a recent interview, a senior analyst at Stifel GMB stated that the current prediction of the price levels for copper were not sufficient enough to encourage more suppliers to come online in response to the expected increase in demand as more countries around the globe electrify their economies.

Egizio Bianchini, the head of metals and mining investment banking at Stifel, explained that company valuation multiples and the average price of the copper metal both need to increase considerably for the industry to attempt to deliver a stronger supply response to the demand expected. Bianchini, who is also the company’s vice chair, added that the international copper industry was undercapitalized and undersized to deliver an aggressive supply response to the expected increase in demand.

Bianchini explained that in spite of the high margins the sector was experiencing, the price of copper remained below incentive pricing when one took into account the various risk factors associated with the financing, development and construction of a mine in the present environment. These factors, which play a significant role in the development of mines, include additional unpredictable environmental regulations, worsening geopolitical environment, dramatically rising inflation for goods and services, high incentives for governments to control more resources via resource nationalism and the expanding timeframes for executing the development and construction of mines.

However, Bianchini also noted that despite these hitches in development, the price of copper appeared strong in comparison to trailing prices. He added that while it wasn’t that simple, forward-looking pricing expectations of copper appeared to be robust enough at face value to attract more suppliers and increase production.

Projections show that by 2023, the global market for the red metal may reach about $171 billion. Increasing electrification and emerging energy trends are expected to contribute greatly to this growth, which will afford suppliers new opportunities to generate revenue.

If production doesn’t increase in tandem with the growing demand, existing producers such as Southern Copper Corporation (NYSE: SCCO) may reap the rewards of being in the industry at a time when supply is tight and demand is soaring.

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