Jefferies Bank believes copper will hit $ 5 per pound: How real is that dream?

The bank’s bet for the year 2026.

Renewable energies and electric cars, the industries that favor a new boom.

72% has risen the price of the red metal from the US $ 21 per pound it marked in March of last year.

The price of copper, which today is around US $ 3.6 per pound, has not stopped rising in recent months, and experts have already begun to wonder how far it can go. The most optimistic response surprised many in the metals market. Jefferies, an important investment bank in the United States and known in Chile because it was one of those that contributed to the reorganization of Latam Airlines, says that the value of our main export product could reach US $ 4 a pound in 2020 and even US $ 5 in 2026.

How real is that bet?

Those who know about the copper market in Chile, the largest global exporter of the red metal, believe that reaching such values ​​is difficult, but not impossible at all.

“A few weeks ago I would have thought that was too optimistic, but I have changed my mind. A scenario with these prices is much more likely than before ”, says the academic of Mining Engineering from the Universidad Católica Gustavo Lagos.

Jefferies believes that after the pandemic, countries will accelerate the development of renewable energy projects, which are highly copper-intensive. “Offshore wind power mills are the most intensive in copper use, with about 15 tons of the metal per megawatt of installed capacity. On-shore mills and solar energy use 5 tons per megawatt, while conventional sources use only one ton ”, says a report from the bank.

The other factor is electric cars, which require about 83 kilos of copper on average, while internal combustion vehicles only about 20 kilos. The chargers of these cars use 10 kilos, which may sound like little, but the consultancy IDTEchEx believes that by 2030 there could be 100 million of these charging centers for vehicles in the world, of the 7.6 million installed today. “Biden’s victory powers all of this. The economic stimuli of US $ 2 trillion that he will carry out, and a shift towards renewable energy and electric cars could boost the price of copper, ”adds Lagos.

Not all that glitters is copper

Chile’s fiscal budget for this year was calculated with a copper of US $ 2.88, an average price that was left behind in August of last year. Obviously a copper that almost doubles that figure is good news for Chile and its fiscal coffers (see box). According to Cochilco data, from its lowest price last year, in March, until today, the metal has risen in price by 72%.

The bad news is that although experts do not see as impossible that copper reaches a price close to US $ 5 per pound, they do believe that it would be a rare event and that, if registered, it would not last long, because of how the supply is balanced and demand.

“It is possible, but there may be problems. The Jefferies projection considers that supply will not react as fast as demand growth; but with a copper over US $ 3 a pound, there are already new projects that become profitable, more with one over US $ 4 a pound. And on the demand side, with such expensive copper, many power generation projects could become unprofitable. So yes, a scenario like this could occur, but it would not be permanent or an equilibrium price ”, explains the director of Studies and Public Policies of Cochilco, Jorge Cantallopts.

In the previous super-cycle of copper, it reached a historical ceiling price of US $ 4.63 at the beginning of 2011, while China grew at rates of 9%. The World Bank believes that the Asian giant could grow 8% this year.

“There we had China entering the acceleration phase and a mining industry that had been investing very little for decades, so there was a very limited response from the offer, and we still did not reach US $ 5; So, I see it difficult. But a level of US $ 4 or US $ 4.5 could perfectly be, and in any case it would be very positive for the fiscal coffers ”, says the executive director of Plusmining, Juan Carlos Guajardo.

In the best case: US $ 5,000 million more for the treasury

The Budget Office calculates that for each more dollar cent in the price of a copper pound, there is an additional income of between US $ 20 and US $ 25 million for Chile’s fiscal coffers. The price forecast by the committee of experts in charge of this estimate, sees a copper rate of US $ 2.88 per pound on average for the next 10 years, according to the Ministry of Finance. “We are talking about that if we went from US $ S3 a pound to US $ 5 a pound, we would have between US $ 4,000 and US $ 5,000 million more in fiscal income”, comments the macroeconomic coordinator of CLAPES UC, Hermann González. But, be careful, this does not mean that Chile would have, in this hypothetical and very optimistic scenario, those millions of dollars to spend. “What is spent is what is perceived as permanent. It is spent based on that long-term projection, which is now $ 2.88 a pound. The rest, whatever is above that estimate, is saved, as happened in the previous cycle of 2003, for example. We saved what was on the estimate of the committee, and that is what we used in the crisis of 2009, those savings “, explains González.

Source: La Segunda

Translated with Google Translator