The copper market is facing a prolonged period of tightness which stretches a few years ahead, according to numerous forecasts.
For the moment the elements of the storm are building but are not yet visible as other factors are affecting demand: China’s battle to contain the spread of Covid is having a significant impact on the country’s economic growth, its industrial production and construction projects; high inflation and rising costs of living in the US and Europe are beginning to dampen consumer demand and the war in Ukraine is adding a factor of unpredictability.
But in the medium to long run, global population growth and the tilt towards a green economy will create more and more need for copper over the coming decade and the currently planned production increases seem unlikely to be able to meet this higher demand.
Production issues
Copper mining is a very cyclical business with periods of high copper prices leading to miners digging out more metal, eventually creating a period of oversupply. This then is followed by a period of lower prices followed by underinvestment, lower output and eventually higher prices, at which stage the process starts again.
We are just emerging from a period of lower prices exacerbated by the additional demand distraction caused by Covid, and while prices are on the rise now it will take a few years before this filters into actual palpable changes in output. The prospecting, feasibility studies and permitting alone take years before they are completed, and this is all well before the first excavator hits the ground to start constructing a mine.
Source: International Copper Study Group
Over the last few years, a number of other factors have come into play that will affect the traditional copper cycle.
The state of play in copper
In some of the very established copper mining regions which have been going for years, such as the US and Chile, ore grades in existing mines are beginning to decline and the amount of mined copper is slowly shrinking. Extended periods of volatile prices and larger-scale economic volatility have had an impact on the cost of capital and, consequently, on project finance.
The lower capital expenditure is contributing to an increase in operating costs and is beginning to show itself in copper supply issues. Energy costs are also on the increase. Many miners use coal for their power generation but climate-related regulations and reputational risks associated with continuing to use coal are adding to the cost. The recent rally in oil prices is contributing painfully to producers’ transport costs.
This is before we start factoring in other environmental issues and the effects on local communities which are drawing more and more attention from investors. In countries like Peru and the Philippines, the relationship with indigenous communities also has to be factored in.
The International Copper Study Group notes that in some countries resource nationalism is complicating issues even further. While some governments are willing to develop their natural resources they are also keen to have more control over the process and extract strong revenue flows from them.
Source: International Copper Study Group
How does this translate into actual projects?
Here are a couple of cases in point:
Established miners in Chile, the world’s largest copper producing region, have been reporting issues with declining ore grades for the last few years. In January and February Chile said that its output had dropped by 7% compared with last year as established mines like Escondida controlled by BHP, El Teniente owned by the state-run company Codelco and Los Pelambres operated by Antofagasta and Nippon Mining produced less copper than in 2021. But a part of that decline will be made up by more nimble newcomers like Canadian firm Los Andes Copper which is exploring the Vizcachitas project, one of the largest advanced copper deposits in the Americas. Vizcachitas is expected to become Chile’s next big copper mine.
In terms of resource nationalism, the massive DRC-based Tenke Fungurume project which was due to start operating in 2023, is a good example. China Molybdenum bought a controlling stake in the company from US miner Freeport McMoRan in 2016 and increased its stake to 80% in 2019 when it also announced that it would invest $2.51 billion to double the mine’s copper output. However, a court case brought against China Molybdenum by Congo’s state miner Gecamines eventually stripped the Chinese firm of its controlling stake. Although the two companies made some form of progress this spring it is anybody’s guess when the mine will actually start producing copper.
Source: International Copper Study Group
Awareness of climate and environmental issues is also putting question marks over certain projects. Nasdaq-listed The Metals Company is currently working on a deep-water project in the Atlantic Ocean to extract metals from the bottom of the sea-bed by collecting polymetallic nodules. But to be able to go ahead with the project the company will need to get the green light from the International Seabed Authority which may not be easy as environmental groups are calling for a flat-out ban on deep-sea mining.
Demand growth boosted by the green energy revolution
Traditional demand for copper such as for electricity purposes, construction and in industrial use has been increasing at a steady rate of around 3.4% a year, slightly overshooting the average annual copper production of around 3.2% a year. But the requirements from electric cars and green energy are adding another fast-growing component to the traditional demand.
For instance, while a conventional car requires on average 23 kilogrammes of copper, a battery-electric vehicle needs 83kg. In 2020 there were already over 10 million electric cars on the road and between then and 2030 when the UK and a number of other countries want to have only electric vehicles available for new sales, the number will increase almost exponentially.
Copper is also used extensively in new generation aeroplanes and trains. According to the ICSG new high-speed trains can use anywhere between 2 and 4 tonnes of copper, typically double the 1 to 2 tonnes used in traditional electric trains. Other new sources of demand include any renewable energy production from wind to solar thermal plants and the infrastructure and charging stations to power up electric vehicles.
Goldman Sachs is forecasting the largest deficit ever in the copper market by the middle of this decade, saying that the severe imbalances building up in the market may not be resolvable at current price levels.
While some of Goldman Sachs’ copper price forecasts look eye-wateringly high and may not really materialise because there is new mine production coming online, it is clear that in the medium-term investors and end-users should prepare for a tight market in which copper will be in high demand.
