A most worthy read below from Canaccord:

  • Freeport McMoRan: “There’s a disconnect in today’s physical market and the current copper price“:  Yesterday, Freeport-McMoRan (FCX-US, not covered, US$28.91, US$41.9B market cap) reported Q2 results…while we aren’t going to report on the actual financial results, the webcast had some worthwhile copper market commentary as part of the 10am ET webcast, highlighted below.
    • The other side of the coin is markets. It’s just striking, how quickly and dramatically markets changed in the second quarter.  Market sentiment reversed, so dramatically.  The recent Bank of America investor survey of institutional investors, where they described it as a full panic-mode, the lowest expectation in the history of the survey going back to 1995 by investors.  The economic analysts are debating on how significant and the duration of the downturn.
    • Our strategy of the in the world’s foremost copper company is intact, and that’s based on the long-term fundamentals of the demand and supply for copper.  But the reality of today’s copper price stares us squarely in the face. It’s a major impact on our revenues and our cash flows. The outlook is uncertain, and listen to calling in a range from a near-term major recession to a longer-term stagflation. Some see a less significant downturn with a near-term recovery. If that happens, watch out.
    • You’ve all read about the macro factors, which have manifested over the last several weeks triggering recessionary concerns. In addition, concerns about the impact of COVID shutdowns in China and a strong U.S. dollar have weighed on copper, which is viewed as a close proxy for sentiment on the health of the global economy.  The reality is that this has been a financially driven anticipatory move in copper prices.  Physical markets remain healthy as evidenced by the global exchange inventories, illustrated on this chart (see slide below), which remain at historically low levels.
    • There’s a disconnect in today’s physical market and the current copper price. Our world in producing and selling copper for us feels about the same that did when copper was at $4.50. Customers report strong business, copper inventories are at historical lows. There’s has been debate, no significant impact in physical demand. Today’s market is tight.
    • Our customers report solid orders and the industry continues to struggle to meet production targets. The current decline in price is below Wood Mackenzie estimate of $4.25 per pound, necessary to incentivize new supply under an accelerated energy transition. It’ll also provide less cash flow to the industry to develop new supplies making the projected deficits in copper more significant in the future.
    • We’re really looking at is the physical markets and right now the physical markets are tight as Richard talked about earlier. Inventories are low. We certainly do not want to produce at a loss at any of our operations, and we’d prefer to keep our reserves in the ground for better markets in the future. But right now, the situation is so dynamic, it appears that physical markets continue to be robust. We’re going to be watching it and it’ll be a combination of factors including what input costs do as well, but we go through mine by mine and look at overall production costs, capital costs, overall cash flows, and we’ll make adjustments as needed. And maybe first adjustments be to defer some capital projects which do have an impact on copper prices — I mean, copper volumes longer term, but we’re going to be looking at all these things and closely monitoring the conditions.
    • In preparing for this call, I’ve made a concerted effort to — with my contacts in the industry who are very knowledgeable of the business on the ground in China…I inquired broadly about where their inventories in China that were not visible. What was going on with Chinese commodity trading companies? And the word came back that inventories were not building. There wasn’t unusual trading. You’re right.  A couple of our mine and the other big mines increased, but there was also supply disruptions in Latin America during the quarter, and it appears that in effect balanced some of the Chinese demand issues, but we don’t see our customers in China, and we have a diverse customer base in Asia.  We by design don’t sell all of our copper into China, but into Japan and South Korea and Taiwan and we don’t see any impacts on demand. So I understand your question and I just want to share with you what I’ve been able to find from it. But we’re just not seeing in our business.  Western world has been strong as well, so that’s been different than in past years.  Even in Europe, our business there is strong. And I know the uncertainty states in Europe over this energy situation, so I’m not diminishing any of that. It’s just our business is strong as many customers over there are avoiding Russian copper, and so it is unusual as I’ve talked about. It is a disconnect — serious disconnect right now between the physical market — marketplace that we’re seeing and what’s going on with copper prices.
    • S&P Globals’ Dan Yergin, a highly respected authority for many years in the energy business, recently published a report (see screenshot and slide below) forecasting a doubling of copper demand, the cause of the energy transition at 2035 accompanied by huge deficits.
    • With the established need for the copper to support the world’s economy, future global growth, we’re in a new era of copper demand with the energy transitions. Supplies for new copper are challenged. There is no clear line of sight for mine development to meet future demand. Result is, it has to be more scrap recovery, it has to be conservation and substitution, more mines in expansions, more mines for the developed expansions that all this takes years to execute, as you can see from our company.  And results will be higher copper prices. The current price for copper is unsustainable. Absent of global long-term economic collapse, that is simply inevitable. 

In his recent Q2 base metals preview The Bear Went Over the Mountain Canaccord Genuity North American mining analyst Dalton Baretto, Dalton noted “From a physical market perspective, the quarter was a tale of two halves: the first half saw a weakening in physical market indicators due to the Chinese lockdowns, while the second half saw a significant improvement. We note that the underlying factors driving the physical market remain strong and are improving.” He notes that over the quarter we saw:
o Copper prices peak at $4.74/lb on April 4th, before declining to end the quarter at $3.74/lb
 Prices have since declined a further 11%, to $3.34/lb
o Exchange inventories remain largely static over the quarter
 Aggregate inventories increased by 21% over the first half of the quarter to 317kt due to the Chinese lockdowns, before declining by 19% through June 30th
 The quarter did, however, see an overall shift of ~30kt from the SHFE to LME sheds, given weaker Chinese demand over the quarter
 Visible exchange inventories remain at historically low levels, at ~5 days of demand, and outside of late 2021, remain at the lowest levels since 2014
o Concurrent with the re-opening of Shanghai on June 1st and announced Chinese stimulus policies, we saw premia for physical metal spike in Shanghai in June
o Treatment charges for concentrate remained largely static over quarter and are holding above benchmark levels for the year on limited smelter capacity relative to mine production
 TCs increased by ~$8/t through April, to $81/t, before declining over the rest of the quarter as Chinese smelters ramped up production
o A substantial short position building on the COMEX during the COVID lockdowns which was not closed out as at the end of the quarter
o Cash-3 spreads that started and ended the quarter in contango, but oscillated through backwardation in between

Looking out into H2 2022, Dalton believes that global macroeconomic concerns and a strong USD will continue to overhang the copper price, despite strong fundamentals in the physical market. While the glut in global finished goods inventories and a slowdown in the global economy will no doubt sap manufacturing demand, he believes this demand loss could be offset in part by Chinese infrastructure and real estate investment. Supply increases remain on the horizon, with several new projects ramping up. As such, absent a significant pivot in the macroeconomic outlook or a supply shock, Dalton expects copper prices to remain at current levels for the rest of the year. He expects pricing to modestly improve in 2023 as the Fed completes its tightening cycle and global economic indicators improve. Over the longer-term, however, he continues to see structural positive changes to copper demand at least through the end of the decade. These include:
o An acceleration of the decarbonization trend as the world (particularly the developed world) moves to improve energy security and reduce its dependence on fossil fuels imported largely from kleptocracies
o Stockpiling of strategic minerals as a bipolar economic world evolves
o Inflationary and demand impacts from the restructuring of supply chains and onshoring of manufacturing capabilities as globalization reverses course

As such, Dalton did not make any changes to our medium term (2024-2029) copper price forecasts accordingly (see Figure 20 below). His long-term incentive price of $3.50/lb remains in place from 2030 onward.