Copper miners are increasing the output at their mines after years of lukewarm performance, but they may not be able to make a meaningful dent in the supply crunch. Years of underinvestment in new copper mines have resulted in a massive shortfall of copper stockpiles and threatened the transition to clean energy. Even though miners are now stepping up their production efforts, copper smelters simply may not be able to keep up with the influx of new copper ore.
Smelters play an integral role in the copper supply chain, turning copper ore from miners into copper metal that can be used in electric vehicles, mobile phones and more. But as miners begin boosting their output to meet the growing demand for copper across several industries, smelters likely will not be able to process the copper ore as fast as it is produced.
Shanghai Metals Markets Ye Jianhua stated that there simply “isn’t enough smelting capacity” to meet the increased copper output. Furthermore, Jianhua noted that a surplus of copper ore would not be able to alleviate the supply shortfall we will experience next year.”
With demand expected to outstrip copper supply in 2023, there has been a rush to convert semiprocessed ores into refined copper. This has resulted in an increase in fees associated with refining copper ore, which are usually deducted from the price of semiprocessed copper ore and are the key factor in profitability for both smelters and traders. There has been a 35% surge in annual benchmark smelting prices, and fees for smelting have reached a six-year high amid increasing demand for refined copper.
Some analysts, miners and traders remain hopeful and expect a significant build-up of an estimated 500,000 tons of copper concentrates through 2023. However, the bottleneck at the smelters means that much of this additional copper ore will not be converted into refined copper fast enough to meet surging demand. In fact, the smelter bottleneck may be so severe that the increased mining may have a minimal if any, effect on the copper market.
The International Copper Study Group stated that copper supply will experience the fastest growth it has seen in seven years, but smelting will grow at a much smaller rate. China Copper International Trading Group deputy general manager Xu Yulong noted that smelters in hubs such as China are already grappling with disruptions that have impacted their output, such as power outages, efforts by the government to ration power and reduced demand for sulphuric acid.
What all this means is that, in due course, the limited copper supplies that extractors such as Southern Copper Corporation (NYSE: SCCO) deliver to the market will be gobbled up quickly, sending prices on an upward trajectory.
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