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Copper and Its Electrifying Future 19 SECTOR BRIEFING number DBS Asian Insights DBS Group61 Research • October 2018 Copper And Its Electrifying Future 19 DBS Asian Insights SECTOR BRIEFING 61 02 Copper And Its Electrifying Future Eun Young LEE Equity Analyst [email protected] Yi Seul SHIN Equity Analyst [email protected] Special thanks to Rachel Miu for her contribution to the report Produced by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights [email protected] Goh Chien Yen Editor-in-Chief Martin Tacchi Art Editor 19 DBS Asian Insights SECTOR BRIEFING 61 03 04 Executive Summary 06 Introduction 12 Bullish on Long Term Copper Prices 18 Copper Demand’s New Growth Path Over the Next Decade 27 Electrifying Society: A Key Driver of Copper Demand 42 Copper Supply Lagging Demand 50 Appendix I Global Copper Sector Value Chain 52 Appendix II China Copper Sector Value Chain 53 Appendix III Top copper mines and refiners DBS Asian Insights SECTOR BRIEFING 61 04 Executive Summary opper is set for an electrifying future. Already the metal of choice wherever electricity is needed, copper is to experience demand at growth rates not seen in previous decades, as the world moves towards the electrification of energy. In particular, the Celectrification of transportation will be a mega-trend. Electric vehicles use copper more intensely than internal combustion engine vehicles (ICEVs) – a battery-powered electric vehicle contains four times as much copper as an ICEV (80kg versus 20kg). Renewable energy also uses significantly more copper per megawatt hour of power generated than for coal or nuclear power. With the electrification of energy, we expect demand for electricity to outstrip the growth in total primary energy demand going forward. Already, 72% of copper consumption is in the power and utilities sector, and in electrical products. We forecast that demand will grow at an annual 3.1% until 2022, exceeding growth over previous decades. Our regional automotive analyst, Rachel Miu, expects the global electric-vehicle market to grow 22% annually to 2030, led by China’s 25% market growth. We expect copper demand from electric vehicles to rise from 208,000 tonnes in 2017 to 1.91mn tonnes in 2030, up 19% annually. Copper consumption from electric vehicles, estimated at 0.9% of the global total in 2017, will rise to 8.2% of 2017’s total copper demand in 2030. Between 2017 and 2040, the International Energy Agency (IEA) forecasts an average global net capacity addition of 74GW for solar photovoltaic, 50GW for wind and 36GW for all other renewables, concluding that 635,000 tonnes of copper demand (3% of global copper consumption in 2017) will be generated every year on average. Copper demand is also set to experience an overall boost in Asia. Historically speaking, copper consumption peaks a second time as emerging economies mature and develop. In our analysis, we see that the United States and Japan had one peak at 11kg/capita, when their gross domestic product (GDP) was around US$20,000-30,000 per capita, and a second peak at US$40,000-50,000 GDP per capita. This suggests huge potential for copper consumption in such countries as China and India, which have yet to hit their second consumption peaks. China, the world’s biggest copper consumer at 50%, has a per capita copper consumption of just 8.2kg while India was at a mere 0.4kg in 2017. Meanwhile, supply is set to remain tight. DBS Asian Insights SECTOR BRIEFING 61 05 Growth in the global copper mine supply is expected to decelerate due to structural challenges. Production costs are rising for existing mines on systematic grade declines and resource depletion, while tepid exploration in recent years have limited discoveries. Net cash cost at mines globally in 2017 is about three times the levels in 2000, while the copper ore grade at mines in Chile, world’s largest producer, has declined by 0.76ppts to 0.65% in 2016, from 1.41% in 1999. Of the 20 biggest copper mines globally, only four began production in the 21st century. The latest newly discovered mines are mostly in Latin America and sub-Saharan Africa, where political and social stability is weak. We forecast that global mine production will grow at a CAGR of 2.9% during 2017-2022, slower than the 4% achieved over 2010-2016. In 2018, refined copper output production is expected strongly recover, compared to 2016- 2017 when weather and labour issues disrupted mines and flattened output. However, output will still grow at a slower pace than demand. Meanwhile, China’s ban on low-grade copper scrap imports has introduced uncertainties for secondary refined copper production, and the prognosis remains unclear, given the stricter environmental regulations on smelters. We expect a 2.6% CAGR in global refining capacity and a 3% CAGR in global refined copper supply in 2017-2022, driven by China and India. Given strong demand growth, we expect a copper shortage over the medium term. The global copper market last registered a surplus in 2015, which turned into a deficit of 326,000 tonnes in 2016, and remained 262,000 tonnes short in 2017. In 2018, we expect the deficit to narrow to 136,000 tonnes. We expect shortages until 2022, with the deficits increasing. Accordingly, we expect London Metal Exchange (LME) copper prices to generally trend up, subject to fluctuations from market dynamics such as warehouse inventory, supply disruptions stemming from weather and labour strikes, and macroeconomic indicators. We forecast that demand will grow at an annual 3.1% until 2022, exceeding growth over previous decades DBS Asian Insights SECTOR BRIEFING 61 06 Introduction rom at least 10,000 years ago, copper, one of the first metals harnessed by humans, has been used to produce everything from coins to ornaments. Today, copper and its alloys are used to produce a range of products necessary to modern life, from cars to electronics. Accordingly, copper demand has grown in line with global Feconomic growth, which makes copper a reliable metal with which to track business cycles over the long term. We believe that copper consumption is entering a new growth phase driven by an “electrifying society”. With the electrification of energy, we expect demand for electricity to outstrip the growth in total primary energy demand going forward. The production, distribution and transmission of all that power will require a great deal of copper. In particular, the electrification of transportation will be a mega-trend. Copper, with its superb electrical conductivity and lack of price-competitive substitutes, will be the key metal wherever electricity is used. Already, 72% of copper consumption is in the power and utilities sector, and in electrical products. We forecast that demand will grow at an annual 3.1% until 2022, exceeding growth over previous decades. Electric vehicles will be a key driver of copper demand. The transition to electric vehicles (EVs) from internal combustion engine vehicles (ICEVs) is inevitable despite controversies over the speed of implementation. Our regional automotive analyst, Rachel Miu, expects the global electric-vehicles market to grow 22% annually to 2030, led by China’s 25% market growth, which is bolstered by government policy. With a battery-powered electric vehicle (BEVs) containing four times as much copper as an ICEV (80kg versus 20kg), the red metal is expected to emerge a big winner from the electrification of light-duty vehicles. We expect copper demand from electric vehicles to rise from 208k tonnes in 2017 to 1.91mn tonnes in 2030, up 19% annually. Copper consumption from electric vehicles, estimated at 0.9% of the global total in 2017, will rise to 8.2% of 2017’s total copper demand in 2030. Renewable energy growth is expected to accelerate copper demand growth. Renewable energy uses copper more intensely than conventional power generation – copper usage per megawatt hour of offshore wind and solar power generation is significantly higher than that for coal or nuclear power generation. Based on International Energy Agency (IEA) forecasts on global average annual net capacity addition between 2017-2040 (74GW for solar photovoltaic, 50GW for wind and 36GW of all other renewables), 635k tonnes of copper demand (3% of global copper consumption in 2017) will be generated every year on average until 2040. DBS Asian Insights SECTOR BRIEFING 61 07 Copper demand in EV (k tonnes) 2,500 10% Copper demand from Hybrids and EVs % of 2017 demand 2,000 8% 1,500 6% 1,000 4% 500 2% 0 0% 17 18F 19F 20F 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F Source: International copper alliance; IDTechEX; BYD, DBS Bank Copper demand from renewable energy (k tonnes) Other renewables Wind Solar 700 600 90 500 175 400 110 300 158 200 370 100 195 0 2010-2016 2017F-2040F Source: IEA, DBS Bank DBS Asian Insights SECTOR BRIEFING 61 08 In our analysis of peak copper consumption, we see that developed economies such as the United States and Japan had one peak at 11kg/capita, when their gross domestic product (GDP) was around US$20,000-30,000 per capita, and a second peak at US$40,000-50,000 GDP per capita. This feature distinguishes copper from other metals and brightens its demand outlook. We are especially optimistic on copper demand growth in the emerging markets. China, the world’s biggest copper consumer at 50%, has a per capita copper consumption of just 8.2kg while India was at a mere 0.4kg in 2017. Copper consumption per capita by country (kg/capita) 14 USA Japan China India 12 10 8 6 4 2 0 0 10000 20000 30000 40000 50000 60000 GDP per capita (US$, constant) Source: Bloomberg Finance L.P., DBS Bank Copper consumption per capita for China & India (kg/capita) 9 China India 8 7 6 5 4 3 2 1 0 0 2000 4000 6000 8000 GDP per capita (US$, constant) Source: Bloomberg Finance L.P., DBS Bank DBS Asian Insights SECTOR BRIEFING 61 09 Growth in the global copper mine supply is expected to decelerate as existing mines experience higher production costs from systematic grade declines and resource depletion, while tepid exploration activities in recent years limit new discoveries.
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