We don’t think about copper all that much. We definitely should.
It is the third most used metal in the world after iron and aluminum, while also being one of the top traded commodities. During economic uncertainty, traders bet on copper as a store of value, along with oil and gold. It is amalgamated with zinc and tin to make ubiquitous alloys, namely brass and bronze. The metal is coveted for its electrical and thermal properties.
Copper is most commonly used in building construction applications. Here, it is used extensively for wiring, piping, roofing, and insulation. Due to its pervasiveness in households, prices of copper are married to the health of the housing markets.
This is followed by its usage in electrical equipment, electronics, and transportation. The per capita consumption of copper in developed countries lies in the range of 140-300 kilograms.
Copper futures are traded on the London Metal Exchange (LME) in the UK and COMEX, part of the Chicago Mercantile Exchange (CME) in the US. The metal goes through cycles of highs and lows. Copper markets performed excellently in early 2000s- coinciding with the rise of China. The housing boom in the US also supported the market. The financial crisis of 2007-08 bottomed the metal’s prices.
They soared again in 2011, the result of a supply crunch, high demand from China and India, and depreciation of the USD with respect to the Euro and Yuan.
The demand
A new copper supercycle is upon us right now. Copper has been on a bull in the past year, along with other commodities such as steel, crude oil and corn. Copper prices averaged 3.50/pound ($7716/metric tonne) in 2021. Copper futures for the month of February reached USD $4.12/pound, double that of the lows of March 2020. Prices should remain high in the long term and could even breach the USD 10,000 per metric tonne mark.
The market has faced supply disruptions due to Covid-19. Mining supply chains were hampered and expansion plans halted in major copper producing countries such as Chile, Peru and Mexico. At the same time demand didn’t shrink, as is the norm after any economic shock. It got support from the recovering Chinese economy, optimism over Covid immunization and a weakening Dollar.
In the long term, China seems ready to splurge over its Belt and Road Initiative (BRI), an era of low-inflation seems to be ending in US, EU, and Japan, and in an effort for carbon-neutrality, a series of investments in electric vehicles and renewable energy seem imminent across the world. These factors will contribute to create a need for more and more copper, pushing its prices. Many of our future plans seem dependent on the red metal.
As the prices of batteries keep going down, and several countries announce stimulus plans for green infrastructure, electric vehicles (EVs) are set to rule the mobility sphere. An EV uses 4 times the weight of copper than an average internal combustion engine vehicle. Here the metal is used in batteries, motors, inverters, along with the usual applications such as wiring. Wood Mackenzie, a commodities consultant predicts that ev sales will reach 45 million by 2040.
EV charging infrastructure also needs a huge amounts of copper. A Level 2 charging station needs 7 kgs, while a Level 3 station needs 25 kgs. BloombergNEF, a commodity research firm, estimates a requirement of 12 million vehicle charging points by 2040.
As per the Power Systems Engineering Center at the National Renewable Energy Laboratory (NREL), by 2050 the electricity generation in the US will have to be increased by 2 times, a result of the increasing demand for electric transportation, among other things.
In the past decade, renewable energy such as wind and solar has become more economical to produce than coal and natural gas in many quarters of the world. The intermittent nature of these power sources has created a need for battery storage. Between transmission, battery and others, renewable power generation requires multiple times more copper than traditional power systems. The 5g telecom rollout will also require a lot of copper for connecting the equipment.
The supply
Copper exploration has diminished in the decade following 2010. Only 16 major discoveries have been made in this time period, and just a single one after 2015 (major projects produce at least over 200,000 metric tons copper per year).
A handful of mines, namely Escondida, Spence, and Quebrada Blanca in Chile, and Cobre Panama and the Kamoa-Kakula in the Democratic Republic of the Congo are expected to provide more than 80% of new copper production (up till 2022-23). This shows the cagey attitude of miners towards exploration. Margins are tight, any profitability contingent on prices remaining above USD 5000 per metric tonne.
The owners of mines complain that they face exorbitant costs on capital, debt, and operations. Incurring these costs has led them to cut corners. Codelco, the biggest miner of copper in the world, has had to pull back mine refurbishments worth over USD 40 billion (spread over 10 years), cutting 20% of its expenses. The government owned entity cited low prices for this step.
The quality of copper ore reserves in Chile have declined by about 25% in the past decade, hampering the supply of the reddish-brown metal. To counter this, miners are forced to dig deeper and wider. Only then do they get an economical product, which is also fit enough for the market.
The surface deposits of mines have been declining over time. Hence, open-pit mining operations are being shifted underground, an expensive endeavor. Codelco has shifted its second-largest mine Chuquicamata underground, resulting in a 40% loss of production in 2021. The fate of BHP’s Escondida (also in Chile) and Freeport-McMoRan’s Grasberg (Indonesia) mines have been the same. The output will take years to recover in these sites.
Finding new locations is considered risky. Also called Greenfield projects, they have largely been ignored for being less lucrative in present circumstances. The increasing prices of copper will make Greenfield projects attractive with the passage of time. Those considered to be of lower grade today will seem bankable in a few years. The miners, however, don’t seem wise to this fact.
Supply has also suffered due to the Covid-19 pandemic, especially in Chile, Peru and Mexico. Many mines have been abandoned and expansion plans have been scrapped. Production in 2020 has decreased for Freeport-McMoRan and Glencore.
Geopolitics also has a role to play. The governments in major mining countries such as Chile and Peru are not very stable. Upcoming elections and labor unrest has made the conditions even more volatile here. Rising prices of copper and the weakening of the currency has increased the margins on copper in Chile, causing strikes as laborers negotiate for increased pay and benefits. Resource nationalism is also on the rise in South America.
Groundwater exploitation is another concern in Chile. The extraction of water from the arid Atacama Desert has altered the ecosystem in the region. BHP has acted to avoid sanctions by the government. It pledged to stop drawing water from the area by 2030, having previously built a desalination plant at the Escondida mine worth USD 3.4 billion in 2018. Other environmental concerns of copper mining like habitat destruction of animals, heavy metals seeping into groundwater, and deforestation have caused chagrin among host countries.
The future
Setting up shop is rather inconvenient for copper miners. It takes over 15 years from discovery phase to production. This is alarming. According to Commodities Research Unit (CRU), considering the dearth of new explorations, copper supply is expected to shrink to 12 million tonnes by 2034, compared to 20 million today.
Roskill, a commodity research firm estimates that our demand of copper would exceed 43 million tonnes by 2035. Being 100% recyclable, scrap copper will be a source of supply in the upcoming years of acute scarcity. Still, the shortfall will be too steep to solely be recoverable by recycling.
While the world is all gung-ho about going green, it doesn’t understand there is a mammoth raw material cost of cutting carbon omissions. Copper shortage has the potential to stall the electric dream.
Logically, the world should respond with more investment for exploration. A similar problem arose when there was severe scarcity of semiconductors across industry following the Covid-19 pandemic. TSMC, the world leader allocated USD 100 billion for capacity building. Multiple billions in USD outlay have also been announced by Samsung and Intel. However, there is a stark difference between the markets as copper has a slow process of planning-to-production.
Let’s see what cards are played next, as we enter an inevitable supply bottle-neck.
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