Copper in Shanghai hit a new high since 2006, what happened?

Due to supply disruptions, copper prices both domestically and internationally have been continuously rising since the end of last year. Recently, boosted by the consolidation of smelting capacity domestically, copper prices have seen a new round of increases.

On Tuesday, April 18th, copper continued its strong performance, with international copper and Shanghai copper main contracts closing higher. The main Shanghai copper futures contract rose by nearly 3%, closing at 78,780 yuan/ton, reaching a new high since 2006.

The international copper main contract surpassed 70,000 yuan during the trading session, marking the first time since October 2021, with a daily increase of 2.81%, closing at 70,310 yuan/ton.

According to media reports, global mining giant Vale's operation permit for the Sossego copper mine in Brazil has been suspended again, potentially affecting nearly 70,000 tons of copper concentrate production, accounting for about 0.3% of global copper concentrate production. Institutions believe that there will be a "very serious" shortage in refined copper supply.

Guotai Junan Securities recently released a research report stating that the supply-demand gap in the copper industry will widen, which is expected to continue to drive copper prices higher, potentially rising to above $12,000 per ton.

Based on recent reports on copper demand for data centers and home appliances, as well as the upward adjustment of domestic copper demand for home appliances, the report has revised the global refined copper supply-demand balance expectations for 2024/2025 from -2/-14 thousand tons to -39/-64 thousand tons. The gaps have been revised up by 410,000 tons and 500,000 tons respectively, representing -19.5 times and 4.5 times of the original figures, with the gaps accounting for approximately 1.4% and 2.2% of global demand, respectively.

Based on the cost structure of copper mines, Guotai Junan Securities pointed out that the highest cash cost of copper mines in 2023 is around $14,495 per ton. According to Woodmac's statistics, in 2023, the average cash cost of global copper mines is around $4,350 per ton, while the 90th percentile cash cost is around $7,103 per ton, indicating a steep tailing feature in copper mine cash costs.

The report also calculated the after-tax net present value (NPV) of copper mines under different copper price and discount rate assumptions. According to the assumptions, copper prices need to rise to $12,000-$14,000 per ton to stimulate potential supply growth According to the complete cost at the 90th percentile of $8,930 per ton, with an investment intensity of $20,000 per ton of copper ore, a mine life of 15 years, a discount rate of 10%, and an income tax rate of 30%, the copper price would need to rise to above $14,320 per ton.

The report concludes that the current copper industry is facing tight supply, with downstream demand exceeding expectations. The copper price has already entered a very high price-demand elasticity zone, where slight demand changes will lead to a rapid surge in copper prices.

The report predicts that the copper industry will face shortages in 2024, with the shortage further expanding in 2025. The copper price is expected to rise to above $12,000 per ton in 2025, with the potential to increase to $14,500 per ton thereafter.

This article is mainly based on the analysis of Wang Zhaohua (SAC license number: S0930515050001) and Fang Yutao (SAC license number: S0930521070003), analysts at Guotai Junan Securities, in the research report "From the perspective of cost curve and net present value calculation, copper prices are expected to rise to above $12,000 per ton - the fifth report in the copper industry series" released on April 15th