Doctor Copper Rises

Informally known as Doctor Copper for its uncanny ability to determine the health of a global economy, the third most used metal in the world is likely to play an ever more pivotal role in coming years. As a highly efficient conductor and one of the few materials that can be 100% recycled, its wide range of uses is no surprise. It is especially significant in the construction and manufacturing industries. This demand will continue to grow, not only as new economies seek to evolve but also as the copper-hungry renewable energy technologies increase the demand for copper further. The combination of heightened demand with a cautious and underprepared supply-side, further weakened by the COVID-19 pandemic looks set to lead to sustained elevated prices.

After bottoming out in March 2020, copper prices have been on the increase ever since. With copper prices more than doubling (from what to what) and reaching a peak in May 2020 (what price did it peak at?). Although these increases partly reflect the COVID-19 recovery, tracking the recovery of China – which account for half of global copper consumption – copper prices are set to continue rising in the next few years and likely for the next decade.

Increased awareness and adoption of renewable energy technologies, likely to be further amplified following the 2021 United Nations Climate Change Conference (COP26), will generate an insatiable demand for copper in the short and long terms. Why is this the case? According to the International Copper Association, a not-for-profit trade association seeking to defend and develop copper markets, an electric battery vehicle uses 83kg of copper compared to only the 23kg found in an automobile with a standard internal combustion engine.

Renewable technologies require approximately four to six times more copper than traditional systems per installed megawatt.In some renewable technologies, the required amount of copper can be up to twelve times that of traditional systems due to the amount of cabling needed.

The investment banks J.P. Morgan and Goldman Sachs have acknowledged this new evolution of copper usage and demand. J.P. Morgan has estimated that copper demand from green transition applications will triple by the end of the decade (to what) . Goldman Sachs has estimated copper to account for nearly 20% of global demand by that point at the end of this decade.

Consequently, the demand for copper in the long-term deriving from traditional and new green applications appears robust and set to continue growing. Despite strong indications that demand will continue to rise, the supply-side has been relatively idle. Companies are increasingly preferring to prioritise shareholders and pay dividends rather than investing in exploration and development projects. There was a substantial decrease in the budget for copper exploration starting from the year 2010 along with the much lower number of new mining discoveries.

Exploration is not only becoming ever more costly and challenging but also riskier. It may take companies years to find economically profitable mining locations. As a result, mining companies have opted to decrease the copper cut-off grade, (the minimum ore grade), which is profitable to mine. Increasing prices will invariably allow for lower cut-off grades as more costly deposits become profitable at the higher prices. Unfortunately, although this process may increase the number of copper deposits that are economically viable to extract, it does not discover any new copper deposits resulting in a short-term fix rather than a long-term solution.

Current deposits in some of the world’s largest copper mines are starting to dwindle. The business intelligence company, CRU Group Ltd, specialising in global mining and metals, predicted that over 200 copper mines will run out by 2035.

Unless investment into exploration increases, the discovery rate of new deposits – which is not necessarily guaranteed – there will not be enough new mines to replace their decommissioned counterparts, much less meet the ever-increasing demand.

Whilst it is probable that sustained higher prices will kick-start this process because mines can take between 5 and 10 years to develop, there will remain a short to medium term constriction of supply. In addition, general business uncertainty and other factors have all contributed towards a relatively reluctant and risk-averse supply side.

The current supply of copper is inadequate to match the growing demand in the short term. Unless higher levels of investment into exploration from rising prices or a decrease in business uncertainty happen, supply deficits will occur in the long run. The inadequate match of copper to its growing demand will determine the extent and length of the inevitable surge in copper prices, as seen in the last 18 months, as well as the implications for all other reliant industries.

By Jeremy Toussaint

Sector Head: Eric Hardy