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Copper

Consumer growth in emerging markets is likely to support copper demand. Copper should also benefit from strong electric vehicle demand growth and a shift to renewable energy generation such as wind and solar. The multi-government-led Electric Vehicle Initiative has set a goal for 30% electric vehicle market share for passenger cars, light commercial vehicles, buses and trucks by 2030. According to Glencore this could increase copper demand by 4.1mnt by 2030, which implies 18% supply growth compared with 2017 production.

Vale estimates that the number of electric vehicles could grow by 12mn units per year from 1.8mn in 2018 to around 13.8mn by 2025. Using NCM811 chemistry this could consume 43 kg of nickel, 6 kg of cobalt, 5 kg of manganese and 11 kg of lithium per vehicle.

The supply side is also supportive for copper. Mining capex remains at very low levels and few base metal projects are being approved. Given continued grade declines at existing mines, incremental volume growth from new copper projects will probably not be enough to meet demand over the medium term. We calculate the incentive price to approve new projects at $8,200/t, which is well above spot.

Renaissance Capital

14 January 2019

Metals & Mining

Positive demand outlook driven by consumer growth, electric vehicles and alternative energy

Supportive supply side

Copper cost curve (22mnt)

Figure 52: 2018E copper cash costs plus sustaining capex, $/t

	9,000
		Incentive price: $8,200/t
	8,000
	7,000
	6,000	Spot price: $5,904/t*
$/t	5,000	Average cash cost: $4,561/t
				3,163Copper,Southern	3,227Norilsk,	3,379Vale, 3,509Resources,Teck	3,959BHP,	4,007Glencore,	4,548American,Anglo
	4,000	2,655Freeport,	2,748Antofagasta,
	3,000
	2,000
	1,000
	0
*Priced as at 8 January 2019.

Figure 53: Copper exchange inventory days and price, $/t (RHS)

18						16	9,811				16													11,000
16				8,693																	14			10,000
14																			12					9,000
12							11					7,136												8,000
10									8								9			9			8	7,000
8	6		Average exchange stock days, 9															6						6,000
6													4								5,949			5,000
				4
4																								4,000
2				3,042																				3,000
0																								2,000
	Jan-07	Jun-07	Nov-07	Apr-08 Sep-08 Feb-09	Jul-09	Dec-09 May-10	Oct-10 Mar-11 Aug-11	Jan-12	Jun-12	Nov-12	Apr-13 Sep-13	Feb-14	Jul-14	Dec-14	May-15	Oct-15	Mar-16	Aug-16	Jan-17 Jun-17	Nov-17	Apr-18	Sep-18

Note: Calculated as exchange inventory/global refined copper demand*365.

Source: Bloomberg, Renaissance Capital

	90th percentile: $5,999/t
4,858	Codelco,5,999
Rio Tinto,	50th percentile: $3,959/t

Source: Bloomberg, CRU, Renaissance Capital estimates

Copper exchange inventories have fallen below the 10-year average

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Renaissance Capital

14 January 2019

Metals & Mining

We estimate that around 8.5% of the copper industry is cash-burning at spot prices.

Figure 54: Percentage of copper cost curve that is cash-burning over time

									26.5%					% Cash burning										Copper, $/t								Average LT cash burn
12,000								26.0%																																								30%
10,000																9,646																			23.0%													25%
					8,448
																																		17.5%	18.5%	17.5%	17.5%
8,000																																																20%
										11.0%																							11.0%													5,904
6,000																										10.0%	10.0%	10.0%				9.5%		10.0%	4,678			10.0%		9.5%							10.5%	15%
																														9.0%	8.5%								8.5%						9.0%	8.5%
4,000											6.5%									5.5%									7.5%												6.5%							10%
	4.5%																						4.5%		4.5%																		5.0%	5.0%
2,000		1.0%	1.0%	1.5%	1.5%	0.5%	1.5%	3,435				3.5%	3.5%	4.0%	3.5%	1.0%	0.5%	1.0%	1.0%		3.5%	4.0%		4.0%									Average LT cash burn, 7.8%									4.0%						5%
0	Mar 07	Jun 07	Sep 07	Dec 07	Mar 08	Jun 08	Sep 08	Dec 08	Mar 09	Jun 09	Sep 09	Dec 09	Mar 10	Jun 10	Sep 10	Dec 10	Mar 11	Jun 11	Sep 11	Dec 11	Mar 12	Jun 12	Sep 12	Dec 12	Mar 13	Jun 13	Sep 13	Dec 13	Mar 14	Jun 14	Sep 14	Dec 14	Mar 15	Jun 15 Sep 15	Dec 15 Mar 16	Jun 16	Sep 16	Dec 16	Mar 17	Jun 17	Sep 17	Dec 17	Mar 18	Jun 18	Sep 18	Dec 18	Spot	0%

Source: Bloomberg, CRU, Renaissance Capital estimates

Our long-term copper price of $6,300/t is based on the 90th percentile of the copper cost curve.

Figure 55: Copper price vs cash costs* at the 90th percentile

Figure 56: Copper price premium (discount) to the 90th percentile

Cash costs, $/t	Copper average price, $/t	70%

	10,000					8,811												60%
													Forecasts					50%
	9,000
							7,060	7,009										40%
	8,000					6,323							6,532		6,367	6,606	6,300	30%
									6,254	5,958				6,000
	7,000
$/t			5,440		5,792							5,587 6,170						20%
											5,200
	6,000	4,515		4,701														10%
	5,000																	0%
																		-10%
	4,000																	-20%
	3,000	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	LT…	-30%

*Cash costs net of by-product credits plus sustaining capex.

Source: Bloomberg, CRU, Renaissance Capital estimates

58%
	28%		30%	39%		Historical average, 17%
		10%			13%		10%			10%	9%
						5%									0%	1%
								-7%	-6%				-3%
2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E		2019E		2020E	2021E

Source: Bloomberg, CRU, Renaissance Capital estimates

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Aluminium

Consumer growth in emerging markets is likely to support aluminium demand.

We believe aluminium demand growth could remain strong as motor vehicle manufacturers continue to replace steel with lighter aluminium. Aluminium is also likely to continue benefiting from packaging growth (beverage cans, etc.). China’s environmental constraints and supply reform policies are likely to limit Chinese aluminium supply growth. We are not aware of major planned aluminium capacity from Western producers.

We calculate the incentive price to approve new projects at $3,000/t, which is significantly above spot.

Renaissance Capital

14 January 2019

Metals & Mining

Aluminium cost curve (67mnt supply)

Figure 57: 2018E aluminium cash costs plus sustaining capex, $/t

3,500

	3,000	Incentive price: $3,000/t
	2,500
			90th percentile: $2,231/t
$/t		Average cash cost: $1,927/t	70th percentile: $2,072/t
	2,000
		Spot price: $1,866/t*	50th percentile: $1,939/t
			1,782
	1,500	Tinto, 1,530
	1,000		South32,
		Rio
	500
*Priced as at 8 January 2019.
			Source: Bloomberg, CRU, Renaissance Capital estimates

Aluminium inventories have been declining since 2014 and are now at a supportive 13 days.

Figure 58: Aluminium exchange inventory days and price, $/t (RHS)

60		3,070			52																		3,500
50								44															3,000
											40										2,256
																							2,500
40
		Average exchange stock days, 29																1,670					2,000
30
																	22
																						1,8631,500
20			15																15			13	1,000
9
10																							500
0																							0
Jan-07	Jun-07	Nov-07 Apr-08	Sep-08	Feb-09	Jul-09 Dec-09	May-10	Oct-10 Mar-11 Aug-11	Jan-12	Jun-12	Nov-12	Apr-13	Sep-13	Feb-14	Jul-14	Dec-14	May-15	Oct-15	Mar-16 Aug-16	Jan-17	Jun-17	Nov-17 Apr-18	Sep-18

Note: Calculated as exchange inventory/global refined aluminium demand*365.

Source: Bloomberg, Renaissance Capital

Aluminium inventories have been declining, supporting a more favourable price outlook

We calculate that around 56% of the aluminium industry is cash-burning at current spot prices, which could trigger capacity cuts and support our constructive medium-term view.

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Renaissance Capital

14 January 2019

Metals & Mining

Figure 59: Percentage of aluminium cost curve that is cash-burning over time

										% Cash burning						Aluminium, $/t						Average LT cash burn
	3,200									2,941		70.0% 65.0%																						80%
	3,000																																62.0%
																																		70%
	2,800
																2,600																51.5%
												49.0%						48.0%
	2,600																																	60%
	2,400																													2,264
																																		50%
																		4.0% 20.0% 27.0% 17.0% 5.5% 18.0% 24.5% 26.5% 28.5% 18.0% 3.0% 4.0% 4.0% 4.5% 22.0% 32.0% 12.0% 7.0% 4.5% 1.5% 21.0% 14.5% 3.0% 1.0% 22.5% 7.5% 34.5%
$/t	2,200																															1,866 40%
	2,000
	1,800												6.5% 3.0% 11.5% 18.5% 18.5% 1.5% 4.0% 1.5% 7.5%																					30%
	1,600																																	20%
						Average LT cash burn, 13.8%
	1,400
		5.5% 4.5% 3.5% 1.0% 2.0% 7.5% 5.0% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.5% 1.5% 1.5% 0.5% 1.0%
	1,200											1,360																						10%
	1,000	Mar 04	Sep 04	Mar 05	Sep 05	Mar 06	Sep 06	Mar 07	Sep 07	Mar 08	Sep 08	Mar 09	Sep 09	Mar 10	Sep 10	Mar 11	Sep 11	Mar 12	Sep 12	Mar 13	Sep 13	Mar 14	Sep 14	Mar 15	Sep 15	Mar 16	Sep 16	Mar 17	Sep 17	Mar 18	Sep 18		Spot	0%

Source: Bloomberg, CRU, Renaissance Capital estimates

Our long-term aluminium price forecast of $2,150/t is around 4% below the 90th percentile of the cost curve.

Figure 60: Aluminium price vs cash costs* at the 90th percentile		Figure 61: Aluminium price premium (discount) to the 90th percentile
Cash costs, $/t	Aluminium average price. $/t	40%

$/t	3,000	1,557	1,751	2,5701,994	2,166	2,502	1,736	2,181	2,340	2,076	1,945	1,871	1,689	1,543	1,9291,968		1,953	2,166	2,254	2,150	0%	10%	8%	29%	22%	3%			2%				4%	2%
	2,800															Forecasts					30%
	2,600															2,110
	2,400																				20%
	2,200																												Historical average, 5%
	2,000																				10%
	1,800
	1,600																											2010 0%			2013 -5% 2014 0%	2015 -1%
	1,400																				-10%						2009 -4%			2012 -3%					2018E -5%			2021E -7%
	1,200																																				2020E -7%
																																				2019E -10%
	1,000	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	LT (real)	-20%
																						2004	2005	2006	2007	2008			2011				2016	2017

*Cash costs net of by-product credits plus sustaining capex.

Source: Bloomberg, CRU, Renaissance Capital estimates

Source: Bloomberg, CRU, Renaissance Capital estimates

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