A lack of investment in new project capacity risks squeezing copper prices higher in the next decade, with current prices falling well short of what is needed to tempt fresh money into the sector.
After years of strong output and lacklustre demand, copper prices are languishing at around $4,750 a tonne, close to January's seven-year low at $4,318.
Analysts surveyed by Reuters in recent weeks pegged incentive prices for the metal - at which investment in new projects becomes viable - at $6,200-7,000 a tonne. The premium of that price over the benchmark suggests consumers are having no difficulty sourcing copper.
"Current spot prices are way below incentive prices, indicating that metal is more than well supplied," said Societe Generale analyst Robin Bhar, speaking as the metals industry prepares to gather in London next week for LME Week, a series of seminars and functions surrounding the London Metal Exchange.
Copper prices have dropped precipitously from over $10,000 a tonne in 2011 to less than half that this year, as a once-undersupplied market swung back into surplus.
That has led producers to mothball capacity, while holding off investing in new projects. Projects given the green light during the boom years have still been coming online, however, keeping supply buoyant.
In terms of maintaining current output, analysts flag up concentration risks in the market."You have five mines accounting for 80 percent of net supply growth,
" Bank of America-Merrill Lynch analyst Michael Widmer said.
"There is a real risk that you won't get each of those mines hitting guidance, and then you will potentially run short of mine supply as soon as next year."
Future projects in copper are likely to be lower grade and in more remote areas with less developed infrastructure, pushing up costs, Citi said.
Deutsche Bank earlier in 2016 predicted small surpluses this year and next, but a deficit of 280,000 tonnes in 2018, 350,000 in 2019 and 280,000 in 2020.
That is likely to trigger a price response, in turn incentivising more supply. But the length of time needed for new copper projects to move from inception to production looks like creating the perfect conditions for a price squeeze.
"Copper is a very slow business in terms of new project development - I always equate it to an oil tanker trying to turn," Macquarie analyst Vivienne Lloyd said.
"It takes eight to 11 years to bring on a greenfield copper mine. Miners haven't been committing the development this year, last year and the year before that would have been required to bring things on by 2020. So, as usual, the cycle will turn too late. We'll have a deficit, and prices will really go up."http://www.reuters.com/article/metals-lmeweek-incentiveprices-idUSL8N1CV5TQ