BofA - The copper supply crisis is herepdf
BofA - The copper supply crisis is herepdf
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  1. Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in relevant markets and the financial resources to absorb any losses arising from applying these ideas or strategies.>> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analyst under the FINRA rules.Refer to "Other Important Disclosures" for information on certain BofA Securities entities that take responsibility for the information herein in particular jurisdictions.BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 73to 74. Metals StrategistThe copper supply crisis is hereCorrelations decouple as metals dance to their own tuneThe mined commoditiesusually follow the business cycle closely.Yet, some of these correlations have broken down: copper has rallied, as iron ore has dropped. Is that sustainable? Yes, in our view, as raw materials increasingly “dance to their own tune”. We expect the supplyconstrained MIFTs (metals important for future technologies) copper,in particular,asit is at the epicentre of the energy transition)to benefit from:(1) investment in green technologies;(2) a rebound of the global economy;(3) restocking;and (4) ratecuts. Meanwhile, the fundamentals of the bulk commodities, the PGMs (platinum group metals) or lithium,do not look quite as constructive. Base metals: the copper supply crisis is hereTight coppermine supply is increasingly constraining refined production: the much-discussed lack of mine projects is finally startingto bite. Similarly, aluminiumproduction growth has halved. Keepingin mind the steady demand backdrop, we are therefore bullish bothmetals and see copper and aluminium risingto an average US$12,000/t (US$5,44/lb) andUS$3,250/t (US$1.47/lb) by 2026. China dialling back on its green investment is a key risk to that bullish forecast. We also expect a zincdeficit this year as mine supply is likely to disappoint.Precious metals: gold and silver rallyGoldand silverare among our most preferred commodities, with the yellow metal pushed up by central banks, China investors and,increasingly,Western buyers on a confluence of macro factors, including an end to hiking cycles. Accordingly, we see the yellowmetal rally to US$3,000/oz by 2025. Silverbenefits from that too, with prices also boosted by stronger industrial demand. This could take prices aboveUS$30/oz within the next 12 months. Meanwhile, palladiumprices are set to trend lower; given palladium demand is dominated by auto catalysts, it should also underperform platinum.Steel and bulks: iron ore rally subsidesThe bulk commodities, including iron oreand coal, have had a good run, but are now rebalancing, likely keeping prices capped near-term. Protectionism has given US steel mills significant pricing power, which should push hot rolled coilup again as the economy bottoms out, infrastructure spending remains strong and lead times expand. MIFTs and exotics: cautious lithium/REE, bullish uranium Meanwhile, we acknowledge the recent rally in spodumene prices, but production discipline is still the name of the game in lithium. Hence, we see upside capped for now, with scope for a more sustained rally once projects are curtailed. We are also constructive on uraniumas years of inventory drawdowns are compounding. We recently also lowered our rare earthsforecasts, but see an end to the destocking in diamonds.08 April 2024CommoditiesGlobalGlobal Commodity ResearchBofA Europe (Madrid)Michael WidmerCommodity StrategistMLI (UK)+44 20 7996 0694michael.widmer@bofa.comDanica AverionCommodity StrategistMLI (UK)+44 20 7996 2325danica_ana.averion@bofa.comFrancisco BlanchCommodity & Deriv StrategistBofA Europe (Madrid)+34 91 514 3070francisco.blanch@bofa.comWarren Russell, CFACommodity StrategistBofAS+1 646 855 5211warren.russell@bofa.comRachel WiserCommodity StrategistBofAS+1 646 743 4069rachel.wiser@bofa.comAndy PhamFICC Quant StrategistBofAS+1 646 743 3365apham3@bofa.comEquity ResearchJason Fairclough>>Research AnalystMLI (UK)jason.fairclough@bofa.comMatty Zhao>>Research AnalystMerrill Lynch (Hong Kong)matty.zhao@bofa.comLawson Winder, CFA>>Research AnalystMerrill Lynch (Canada)lawson.winder@bofa.comChen Jiang>>Research AnalystMerrill Lynch (Australia)chen_jiang@bofa.comSathish KasinathanResearch AnalystBofASsathish.kasinathan@bofa.comSee Team Page for List of AnalystsIn this report, we make several changes to our short-and long-term commodities forecasts. See Exhibit 1for details.Accessible version
  2. 2Metals Strategist| 08 April 2024ContentsOverview: constructive outlook3Price forecasts: mined commodities could push higher3Overview: green spending and economic rebound5Base metals13Aluminium: prices supporteddespite macro headwinds13Copper: mine supply tightness starts to bite16Nickel: Sino-Indonesia supply dominance caps prices19Tin: the forgotten metal22Zinc: likely to trade at marginal cost25Precious metals28Gold: next leg higher to come when Fed cuts rates28Silver: prices rising, when industrial demand rebounds31Platinum group metals: first casualty of energy transition34Steel and bulk commodities37Steel: prices have fallen on softer fundamentals37Iron ore: no catalyst near-term43Thermal coal: remain constructive vs current fwd curves46Metallurgical coal: prices look for a floor, recovery in 2H49MIFTs52Lithium: geopolitics blows up lithium52Uranium: prices near 15-year high55Rare earths elements: more cautious59Exotic commodities62Diamonds: the end of the destock62Appendix68Research Analysts75
  3. Metals Strategist| 08 April 20243Overview: constructive outlookPrice forecasts: mined commodities could push higherMoving into the second quarter, we updateour price forecasts. Most notably, the much-discussed lack of mine projects is becoming an increasing issue for copper. This, along with investment in green technologies and a rebound of the global economy,should lift prices toUS$10,250/t (465c/lb) by 4Q24. Similarly, while we mark-to-market aluminiumdown, we also expect a cyclical rebound to support the white metal.Meanwhile, given the Sino-Indonesian overinvestment in capacity, nickelshould,for now,continue to trade at marginal cost. Finally, we are also bullish zincas mine supply may once again disappoint this year.Exhibit 1:BofA price forecastsWe lift copper, gold, silver and lithium forecasts2024E2025ENewOldChangeNewOldChangeBase metalsAluminium$/t2,4472,563-4.5%3,0003,0000.0%c/lb111116-4.5%1361360.0%Copper$/t9,3218,6258.1%10,75010,5002.4%c/lb4233918.1%4884762.4%Lead$/t2,0222,0001.1%1,7501,7500.0%c/lb92911.1%79790.0%Nickel$/t17,46018,750-6.9%17,62520,000-11.9%c/lb792851-6.9%800907-11.9%Tin$/t27,91926,500$/t1,2661,202Zinc$/t2,7062,37513.9%2,6882,25019.4%c/lb12310813.9%12210219.4%Precious metalsGoldnominal, $/oz2,3171,97517.3%2,5132,15016.9%real, $/oz2,3171,97517.3%2,4512,09816.9%Silvernominal, $/oz26.4623.2613.8%32.5024.7531.3%real, $/oz26.4623.2613.8%31.724.1531.3%Platinum$/oz9901,050-5.7%1,0001,250-20.0%Palladium$/oz84475012.6%60050020.0%Bulk CommoditiesIron ore fines$/t cif107125-14.1%90900.0%Hard coking coal$/t fob2802703.6%2302157.0%Semi-soft$/t fob1931788.3%1521427.0%Thermal Coal$/t fob145150-3.6%1251250.0%MIFTs and other commoditiesLithium spodumene$/t1,10765070.3%1,4881,4383.5%Lithium carbonate$/t14,13510,50034.6%16,31315,5005.2%Lithium hydroxide$/t13,30411,61314.6%17,31317,0001.8%Alumina$/t3473402.0%3483480.0%Cobalt$/lb16.018.0-11.3%16.018.0-11.3%Uranium$/lb105.0105.0-0.0%120.0115.04.3%Molybdenum$/lb19.918.110.1%19.918.110.1%Manganese ore$/lb4.24.3-3.9%4.24.3-3.9%SteelNorthern Europe$/t6836830.0%7147140.0%North America$/t937959-2.3%88279910.3%China$/t5955950.0%6026020.0%Source:BofA Global Research BofA GLOBAL RESEARCHGoldremains one of our favourite metals and we expect prices to average US$2,500/oz by the fourth quarter, potentially hitting US$3,000/oz by 2025. Notably, demand from central banks and China’s retail buyers has been strong. If Western investors join the party on rate cuts, the yellow metal will move a leg higher; this may also be necessary, if sentiment in China improves, and less investment flows into gold. Silver should also benefit from lower rates, but will likely outperform gold as industrial demand rebounds and PV (photovoltaic)manufacturers move to panels that require more of the precious
  4. 4Metals Strategist| 08 April 2024metal. Meanwhile, the PGMsare challenged given demand is heavily exposed to cars with internal combustion engines, which are losing market share to EVs(electric vehicles).Given the lack of production discipline, we are particularly concerned aboutpalladium, which will likely continue to underperform platinum whose demand is less exposed to the auto industry.The bulk commodities, including iron oreand coal, have had a good run, but are now rebalancing, likely keeping prices capped nearterm. Protectionism has given US steel mills significant pricing power, which should push hot rolled coilup again as the economy bottoms out, infrastructure spending remains strong and lead times expand. Meanwhile, we acknowledge the recent rally in spodumene prices, but production discipline is still the name of the game in lithium. Hence, we see upside capped for now, with scope for a more sustained rally once projects are curtailed. We are also constructive on uraniumas markets remain in deficit and several years of inventory drawdowns are now compounding. We recently also lowered ourrare earthsforecasts, but see an end to the destocking in diamonds.Exhibit 2: Quarterlyand annual price forecastsWe see copper, aluminium, gold and silver end the year higherCurrent1Q242Q24E3Q24E4Q24E1Q25E2Q25E20232024E2025E2026E2027E2028ELT priceBase metalsAluminiumUS$/t2,413 2,2402,3002,5002,7503,0003,0002,2542,4473,0003,2503,0152,7812,546USc/lb109 102104113125136136102111136147137126115CopperUS$/t9,209 8,5349,0009,50010,25010,50010,5008,4849,32110,75012,00011,20610,4119,617USc/lb418387408431465476476385423488544508472436LeadUS$/t2,098 2,0872,0002,0002,0001,7501,7502,1362,0221,7502,0242,2172,4092,602USc/lb95 95919191797997927992101109118NickelUS$/t17,638 16,83917,50017,50018,00018,00017,50021,48317,46017,62517,50017,47517,44917,424USc/lb800 764794794817817794974792800794793792790NPI, 8-12%CNY/t930 9389759751,0031,0039751,1319739829751,0531,1321,210TinUS$/t28,771 26,17528,00028,50029,00026,50026,50025,92227,91926,50025,50025,33325,16725,000USc/lb1,305 1,1871,2701,2931,3151,2021,2021,1761,2661,2021,1571,1491,1421,134ZincUS$/t2,601 2,4752,6002,7503,0002,7502,5002,6482,7062,6882,4242,5962,7692,942USc/lb118 112118125136125113120123122110118126133Precious metalsGold, nominalUS$/oz2,334 2,0692,3002,4002,5002,5002,3001,9432,3172,5132,6252,4482,2702,093Gold, realUS$/oz2,0692,3002,4002,5002,4392,2441,9432,3172,4511,9951,9461,8981,850Silver, nominalUS$/oz27.80 23.3326.0027.5029.0031.0029.0023.3926.4632.5035.0033.1431.2829.42Silver, realUS$/oz23.3326.0027.5029.0030.2428.2923.3926.4631.7133.3130.8828.4426.00PlatinumUS$/oz939 9109501,0001,1001,0001,0009679901,0009501,1241,2971,471PalladiumUS$/oz1,014 9789008007006006001,3408446005008241,1471,471Current1Q242Q24E3Q24E4Q24E1Q25E2Q25E20232024E2025E2026E2027E2028ELT priceBulk CommoditiesHard coking coalUS$/t fob224 308 240 280 290 290 200 296 280 230 220 222 224 226 Semi-softUS$/t fob148 238 158 185 191 191 132 220 193 152 145 134 133 132 Thermal CoalUS$/t fob129 127 148 151 153 125 125 176 145 125 112 112 113 113 Iron ore finesUS$/t CIF99 120 100 100 110 90 90 120 107 90 90 94 98 102 Current1Q242Q24E3Q24E4Q24E1Q25E2Q25E20232024E2025E2026E2027E2028ELT priceOther materialsLithium spodumeneUS$/t1,035 9271,2001,1001,2001,2001,5003,8211,1071,4881,7501,6501,5501,450Lithium carbonateUS$/t14,100 13,78914,50013,75014,50015,25016,00040,46914,13516,31318,00018,66719,33320,000Lithium hydroxideUS$/t14,100 11,96514,00013,25014,00014,75017,50044,50013,30417,31319,50020,16720,83321,500Alumina$/t372 367340340340348348344347348357375394412Uranium$/lb96.9095.00110.00118.00115.00120.0060.17104.98120.00135.00110.0085.0060.00Molybdenum$/lb19.5 19.9319.9319.9319.9319.9319.9324.1219.9319.9319.9317.5415.1512.76Cobalt$/lb16.4 15.9615.9615.9615.9615.9615.9617.3815.9615.9618.4419.8421.2322.63Manganese ore$/dmtu4.20 4.184.184.184.184.184.184.744.184.184.935.526.116.70Steel, HRCHRC, EuropeUS$/t627719701639674721702767683714HRC, USUS$/t9201,0241,009909805882882993937882HRC, ChinaUS$/t512568585602623592597565595602Source:BofA Global ResearchBofA GLOBAL RESEARCH
  5. Metals Strategist| 08 April 20245Overview:green spending and economic reboundCopper versus iron ore: green economy versus old economyPrices of the mined commodities usuallyfollow the business cycle closely.Yet, Exhibit 3highlights that copper has rallied, at the same time as iron ore has dropped. Is that sustainable? Yes, in our view, as these two raw materialsand other commodities increasingly “dance to their own tune”. Exhibit 3: Copper and iron ore pricesPrices movements have diverged of lateSource:Bloomberg, BofA Global ResearchBofA GLOBAL RESEARCHExhibit 4: China, steel exportsSteel shipments have been extremely highSource:Bloomberg, BofA Global ResearchBofA GLOBAL RESEARCHTaking a closer look into the fundamental backdrop, Exhibit 4shows that China’s steel exports have been extremely high on weak domestic demand, partially because the property market remains under pressure. Indeed, this prompted unseasonal steel production cutslate last year (Exhibit 5). Meanwhile, copper’s fundamentalslook very different, with Exhibit 6outlining that apparent demand (refined production + net imports -inventory changes) has rallied by 23% YoY YTD, partially because spending on the green economy has held up. Beyond that,globally, there is a trickle of other sectors, including data centres, that have been adding to consumption.Mine supply is also increasingly constraining refined production, with China’s smelters discussing a 5-10% production cut of late (more on this below).Exhibit 5: China steel productionSteel production has been declining unseasonally in 4Q23Source:Bloomberg, BofA Global Research BofA GLOBAL RESEARCHExhibit 6: China apparent copper demand YTDApparent copper demand was very healthy in January and FebruarySource:Bloomberg, CRU, Woodmac, BofA Global ResearchBofA GLOBAL RESEARCH80100120140160180200220240700075008000850090009500100001050011000Jan-21Jun-21Dec-21May-22Nov-22May-23Oct-23Iron ore, US$/t (rhs)Copper, US$/t (lhs)2345678910JanFebMarAprMayJunJulAugSeptOctNovDecMt5y range (2018-2022)Prior 5 year average202320245060708090100110JanFebMarAprMayJunJulAugSeptOctNovDecM t5y range (2018-2022)5y avg (2018-2022)20232024-20%-15%-10%-5%0%5%10%15%20%25%30%2012201420162018202020222024YoY chge
  6. 6Metals Strategist| 08 April 2024China has a structural issueProductivity growth has slowed; debt is less effective in generating growthSticking with headwinds in China, the countryindustrialised rapidly after joining the WTO in 2001, with GDP per capita rising almost tenfold over the past 20 years (Exhibit 7). Yet those growth rates have now slowed visibly (Exhibit 8). This deceleration is not unusual for emerging markets, often giving rise to concerns aboutfalling into the middle-income trap, whereby rising wages erode competitiveness, making it hard for EMs to compete with DMs, which tend to be more productive and innovative.Exhibit 7: China GDP per capitaGDP per capita has risen steadilySource:IMF, BofA Global ResearchBofA GLOBAL RESEARCHExhibit 8: China GDP per capitagrowthThe growth in GDP per capita has slowed graduallySource:IMF, BofA Global Research BofA GLOBAL RESEARCHThese issues are reflected in various growth metrics. Exhibit 9, for instance, shows that China outpaced India’s productivity growth in the decade before the Global Financial Crisis, but it has since fallen behind. The structural headwinds to growthhave also been mirrored in debt dynamics, with China now forced to spend more to generate a unit of GDP growth (Exhibit 10). Overcapacity, not just in housing, is a big issue.Exhibit 9: Labour productivity per hour workedChina has fallen behind IndiaSource:Bloomberg, BofA Global ResearchBofA GLOBAL RESEARCHExhibit 10: China debt versus real GDP increasesDebt has delivered less bang for the buckSource:Bloomberg, BofA Global ResearchBofA GLOBAL RESEARCHHousing –inventory overhang an issueChina’s housing market has historically accounted for around one-third of domestic copper demand. However, we argue that the sector is in structural decline (Exhibit 11), with housing demand set to fallgradually in the coming years. Exhibit 12shows that housing starts are running well below demand. 02,0004,0006,0008,00010,00012,00014,00016,00018,00020,00020002003200620092012201520182021US$0%4%8%12%16%20002003200620092012201520182021YoY chge-10%-5%0%5%10%15%20%1980198419881992199620002004200820122016YoY chgeIndiaChina0.01.02.03.04.05.06.07.08.0200520072009201120132015201720192021YoY debt/ YoY real GDP
  7. Metals Strategist| 08 April 20247Exhibit 11: China, housing demandThe demand in China for housing will likely keep trending lowerSource:BofA Global ResearchBofA GLOBAL RESEARCHExhibit 12: China, housing demand and housing startsHousing starts are running well below demandSource:BofA Global ResearchBofA GLOBAL RESEARCHOur China property team estimates that vacant secondary stocks represent five to sixyears of new home demand, so mathematically, new home demand can be satisfied entirely by vacant secondary stocksfor now. Exhibit 13: China, housing marketsActivity is set to contract20232024E (new)National sales volume-8.20%5% to 10% dropNational sales value (commodity housing only)-6.00%9% to 16% dropResidential new starts-21.00%9% to 15% dropResidential Completion17.20%5%-10% dropSource:BofA Global ResearchBofA GLOBAL RESEARCHFor housing starts to stabilise, secondary stock owners need to stop putting their vacant units up for sale (possible if they feel more confident, or if prices keep falling to below cost level), or new starts will have to run low for a few years to allow destocking to take place. Either way, while the property sector has been stabilising at a low level, it is unlikely to make a meaningful contribution to commodities demand again. That’s why other sectors, including grid investment and car production,matter so much.China tackling shortcomings, which matters for metalsEncouragingly for the metals, the Chineseauthorities have acknowledged the issues at hand and are investing heavily in updating the country’s industrial base to give the economy a sustained boost. Indeed, maintaining elevated growth is a focus of China’s Communist Party(CCP), so it is not surprising that the authorities are increasingly concerned about issueslike youth unemployment. The government’s ambitions have been captured in industrial policies like Made in China 2025, which targets making China the leading manufacturing power by 2049. Importantly for commodities, many of the industries with government focus are metalsintensive. New materials, along with energy savings andnew energy vehicles, are seen as critical for the country.Indeed, the government takes a hands-on approach toindustrial policy, guiding on capital allocation, policy coordination and tech-related innovation. Of course, this ultimately aims at lifting the country out of the middle-income trap through transformation of the manufacturing base, which is set to focus on higher value-adding activity that is increasingly independent of foreign technology.02004006008001000120014001600180020002008201120142017202020232026202920322035M sqmurban village redevelopmentHouse retirementShanty townLiving space upgradeUrban population growthActual GFA sold - 200 400 600 800 1,000 1,200 1,400 1,600 1,800200020022004200620082010201220142016201820202022202420262028203020322034M sqmHousing startsHousing demand
  8. 8Metals Strategist| 08 April 2024Exhibit 14: Key milestones in ChinaChina aims to be the leading manufacturing power by 2049Source:BofA Global ResearchBofA GLOBAL RESEARCHExhibit 15: China’s 10 core industriesThe government focuses on 10 core industries, many of which are metals-intensiveSource:BofA Global ResearchBofA GLOBAL RESEARCHNotwithstanding, the three Ds –deflation, debt and demographics –are formidable challenges for the CCP. Managing those, while reconfiguring the economy will be tricky. Wider demand weakness is the key issue in China, and that is unlikely to be remedied bymeasures targeting the supply side of the economy, like credit easing. Indeed, the government has been puttingtogether a policy mix that should lift sentiment. Testament to that, the authorities are now looking to boost equity markets. Overall, from a metals perspective, we are focused on how committed the authoritiesare to invest in the 10 core industries to sustainmetals demand. Demand supported by green spendingExhibit 16highlights that China’s focus on the energy transition already made a big contribution to copper offtake in 2023, more than offsetting weakness in the housing market. Exhibit 16: China copper demandGreen spending has offset the weakness in the housing marketSource:Bloomberg, BofA Global Research BofA GLOBAL RESEARCHExhibit 17: Europe copper demandGreen spending has been adding to copper demand in EuropeSource:Bloomberg, BofA Global ResearchBofAGLOBAL RESEARCH0%1%2%3%4%5%6%7%8%9%04,0008,00012,00016,00020,0002018201920202021202220232024tonnesHousingGreen spendingAll elseTotal YoY (rhs)-9%-6%-3%0%3%6%9%05001,0001,5002,0002,5003,0003,5004,0004,5002018201920202021202220232024EtonnesGreen spendingAll elseTotal YoY (rhs)
  9. Metals Strategist| 08 April 20249While China’s State Grid is targeting CNY500bn of grid investment this year, slightly below 2023’s level, spending by the Grid should nonethelesssupport consumption. Other countries also remain focused on facilitating the energy transition, so demand for copper-containing renewables will likely be healthy ex-China too. Exhibit 17shows our assumptions for Europe, highlighting that demand is likely pulling higher in that regiontoo, despitethe weak macroeconomicbackdrop. What other sectors beyond renewables are also supporting demand?We answer this question in the sections below.Autos –an important growth driver;loweringEV penetration rates We have lowered EV penetration ratesLooking at transportation, usually 10% of copper demand, we have cut electric vehicle penetration ratesfrom 17.4% to 15.4% in 2024, shownin Exhibit 18.Exhibit 18: EV penetration ratesWe have reduced EV penetration rates in 2024 and 2025Source:Platts, BofA Global ResearchBofA GLOBAL RESEARCHExhibit 19: Global car productionCar production is expandingSource:Platts, BofA Global ResearchBofA GLOBAL RESEARCHThis matters becauseEVs have a higher copper content than internal combustion enginecars. Notwithstanding, Exhibit 19shows that total car production should still expand. Pulling this together, global copper demand from transportation is set to increase by around 5% this year. Yet, factoring in lower EV penetration rates, we have reduced copper demand by around 200kt pa in 2024 and 2025, or around 0.7% of global consumption, compared toour previous forecasts. Less copper needed in new EVs, but still more than in traditional carsCar technology, which is transforming rapidly, is another focus and we follow changes to the power system closely. There are two electricity circuits in an EV: one for the drivetrain and an ancillary system. Tesla recently announced a shift toward a 48V architecture in the ancillary system, which currently runs on 12V in all cars, even in EVs. Working through the numbers, Tesla said that a 48V system may require 75% less copper. The drivetrain battery contains around 40kg of copper, which is just under 50% of the total EV copper content. Assuming the drivetrain is unchanged, Tesla’s comments imply that the total copper content would fall by around 38% or by 30kg to 50kg, compared to30kg in aninternal combustion engine car. Therefore, updating the ancillary infrastructure does reduce the copper intensities of EVs, but thesevehicles still need more copper than traditionalcars.Copper demand should therefore increase, as long as more cars are put on the road.Data centres will add 500Kt to copper demand by 2026Against the backdrop of rising metals demand from the electrification ofthe global economy, there is increased focus on the impact of investment in data centres and artificial intelligence on the mined commodities. Copper,in particular,has been discussed and is important in two sets of applications:0%5%10%15%20%25%30%35%40%45%50%2018202020222024E2026E2028E2030E202020212022202320240204060801001201401112131415161718192021222324E25EM unitsEVPHEVHEVICE, incl HEVFCEV
  10. 10Metals Strategist| 08 April 2024•Cablingwithin the data centre, acknowledgingthat there is an ongoing debate on whether fibre or copper cables will ultimately prevail;•Electricitynetwork, i.e.,power generation and transmission/distribution.Sticking with the second bullet point, electricity demand indata centres comes from three processes; these matter forefforts to reduceelectricity intensity:•Computingaccounts for 40% of electricity demand;•Coolingrequirements to achieve stable processing efficiency make up about another 40%;•Other associatedIT equipmentaccounts for the remaining 20%; thisincludesthe power supply system, storage devices and communication equipment.All in, the IEA1estimates that data centres, cryptocurrencies, and artificial intelligence consumed about 460TWh of electricity worldwide in 2022, equivalent to around 1.7% of total demand. Exhibit 20: Regional breakdown of electricity demand, 2021-26Electricity demand is set to grow in all regionsTWh20212022202320262022/212023/22CAGR 2024-26Africa7537657808871.6%2.0%4.4%Americas6,2196,3826,3536,6772.6%-0.5%1.7%of which US4,1704,2774,2084,4042.6%-1.6%1.5%APAC13,19313,73314,39416,4594.1%4.8%4.6%of which China8,3078,6159,16410,5733.7%6.4%4.9%Eurasia1,3021,3161,3351,3861.1%1.4%1.3%Europe3,8133,6743,5863,845-3.6%-2.4%2.4%of which EU2,7362,6512,5682,749-3.1%-3.1%2.3%Middle East1,1721,2101,2351,3473.2%2.1%2.9%World26,45227,08027,68330,6012.4%2.2%3.4%Source:IEA, BofA GlobalResearchBofA GLOBAL RESEARCHGlobal electricity consumption of data centres, cryptocurrencies and artificial intelligence is set to range from 620-1,050TWh in 2026, with a base case estimate ofaround 800TWh. Of course, the trajectory of electricity demand from data centres falls within a relatively wide range because technology is evolving fast:•More efficientcooling systemscan lower electricity demand by 10%. Research shows that power consumption can be reduced by as much as 20% when operating with direct-to-chip water cooling and specific low viscous fluids to cool all other components. •Machine learningcan reduce the electricity demand fromservers by optimising their adaptability to different operating scenarios. Google reported its DeepMind AI reducedelectricity demand of its data centre cooling systems by 40%.So what does that mean for copper demand?Exhibit 20implies that the share of data centres, AI and crypto should increase to 2.6% of electricity demand by 2026. Or put differently: demand is set to increase by 3,521TWh, with IT contributing 340TWh, or 10%, to that number. We assume that copper demand from electricity will rise by 4.7Mt between 2022 and 2026. This number does not include data centres outright. Hence, global copper consumption could be around 500Kt higher by 2026 than we had originally assumed; to put this into context, this is equivalent to a 2% uplift to last year’s 26.1Mt. In our view, this is not a game-changer, but definitely an additional contribution to a persistent creep higher in the use of the red metal. 1IEA, Electricity 2024 -Analysis and forecast to 2026
  11. Metals Strategist| 08 April 202411Government support to white goodsmore ambivalent, but it doesn’t hurtAs our colleagues in the economics team note (see China Watch: Limited details on equipment renewals & consumer goods trade-in policies 18 March 2024), China’s State Council announced an action plan on large equipment renewals and trade-in of consumer goodson 13thMarch. This plan implementsthe decisions made at the CEWC(Central Economic Work Conference)last Decemberand the 4th meeting of the Central Financial and Economic Affairs Commission recently.Home appliances: limited impact for now, in our viewThe initiativesupporting the trade-in of home appliances encourages local governments with “suitable conditions”to offer subsidies for green energy smart home appliances. The plan also sets a target of 30% growth of appliance replacement volume from 2023 to 2027. However, the plan has not specified the exact amount of subsidies. It also emphasises a market-led approach and calls for local government to maneuverexisting funding without the central government committing to extra support. Given fiscal pressure faced by local governments, we only expect limited subsidies to be granted (most of which will be concentrated in wealthy regions, such as Shanghai,which has recently announced a new roundof trade-in subsidies), so the impact may not be meaningful nationwide. This is very different from the last round of trade-in programmes following the Global Financial Crisis. Back then, total trade-in subsidies amounted to RMB30bn covering three years,with 80% funded by the central government and the remaining 20% by local governments. Subsidies were up to 10% of selling prices, which led to RMB342bn home appliance sales over the three-year period. Meanwhile, we also believe the central government willadopt a wait-and-see attitude. Should further downside risks to the economyemerge, we would not rule out the government committing tofurther funding support in the future to boost home appliance replacement demand.Exhibit 21: White goods: domestic volume surged during past policy stimulus cyclesDomestic ex-factory volumeSource:China IOL, BofA Global Research estimatesBofA GLOBAL RESEARCHExhibit 21picks up on this, showing that previous stimulus programmes have boosted sales in white goods by up to 20-30%. To put this into context, assuming that white products make up around 20% of Chinese demand, this implied a boost to China’s copper consumption of around 4-6ppt; globally, this means that demand could end up around 2-3ppt higher. So against all the caveats, the initiative might still add to demand, although we don’t factor it inat the moment.-20%-10%0%10%20%30%40%020406080100120140160180200200620072008200920102011201220132014201520162017201820192020202120222023RefridgeratorWashing machineAir-conTotal volume YoY growthmn unitsTrade inGo ruralEnergy(I)Energy (II)Shantytown development
  12. 12Metals Strategist| 08 April 2024The global economy is also bottoming outFinally, having discussedthe support to metals demand from non-traditional sectors, including renewables, EVs and data centres, it is also worth noting that the global economy is bottoming out, which should ultimately help demand for the cyclical metals (Exhibit 22).Exhibit 22: GDP, industrial productionand investmentEconomic activity is set to turn the corner in the US, Europe and China this yearYoY changes2022202320242025GDPUS1.92.52.71.9Europe3.50.50.41.1China05.24.84.6Industrial productionUS3.40.20.71.4Europe2.2-2.1-0.12.6China3.64.54.64.2InvestmentUSResidential Investment-9-10.62.72.4Non-residentialInvestment5.24.42.81.9EUInvestment 2.61.40.81.4ChinaFAI5.1354.8Note: green colouring represents an acceleration of growth, yellow a decelerationSource:BofA Global ResearchBofA GLOBAL RESEARCH
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