IN LATE JUNE Robert Friedland, the bombastic head of Canadian mining company Ivanhoe, warned that if copper supply shortages derailed the energy transition, the world would face a “train wreck”. The metal is used in everything from wiring to wind turbines – and green regulations in America, Asia and Europe will soon require many more of them. In response, Friedland said the price of copper could surge 10-fold.
At the moment, however, the train has not derailed, but is chugging along happily. After peaking at $10,700 a tonne in March last year on the London Metal Exchange, copper prices have fallen about 10% since January to $8,300 a tonne. Spot prices remain at or above prices for three-month delivery, suggesting investors are not expecting a recovery any time soon. What’s up?
Because of its diverse uses, which include construction, electronics, and weapons, copper prices are an indicator of the health of the global economy, earning the metal the nickname “Dr. copper”. Concerns about the economy could therefore lead to investors taking a bleak view of copper’s prospects. The post-COVID recovery in China, which consumes up to 55% of global supply, is already flagging. Growth is also weakening in the West, as rising interest rates are making themselves felt.
But the history of lack of demand does not fully explain the price drop. Despite the sluggishness in the country’s construction sector, China is using 5% more copper this year than last year, possibly because the metal – used to make cladding, pipe and roofing – tends to track construction completions, which have been delayed, as the construction starts. A 7% increase in refrigeration equipment production in anticipation of a hot summer is also supporting demand.
If the copper markets are extremely cool, that is also because the supply has increased. During the winter, a series of disruptions — from protests in Peru to floods in Indonesia — impacted global production. Now those problems are going away. As a result, smelters are confident enough to charge miners higher fees, suggesting there is no shortage of raw materials (see chart 1).
At the same time, financial investors reject copper. When interest rates rise, they prefer to hold cash-generating assets rather than commodities that don’t produce income. Net “non-commercial” positioning in the copper futures markets has been in the red for most of the year, suggesting that more investors are betting prices to fall than to recover (see Chart 2). Yet today’s prices are still $2,500 per tonne above production costs at the marginal mine, notes Robert Edwards of CRU, a consulting firm. This suggests that the recent correction has been heating up the market rather than driving prices down too much, suggesting they could remain subdued for a while longer.
As the energy transition accelerates, this should trigger a surge in demand. Sales of electric vehicles (maybes) that are already increasing are expected to increase significantly in the coming years, and each unit contains three to four times more copper than its gasoline-powered counterpart. Even in a slow transition scenario, the International Energy Agency (IEA), an official forecaster, estimates that copper demand from green applications, driven by the maybe Boom and submarine cables for wind farms will almost double by 2040.
The supply might struggle to keep up. The average age of the world’s ten largest mines is 64 years, forcing miners to dig deep for ores of increasingly poor quality, making each new ton of refined copper more expensive to produce. New mines are rare. Assuming all certain and probable projects are implemented, consulting firm McKinsey forecasts supply will reach 30 million tons by 2031, 7 million tons less than estimated demand.
A severe crisis of the kind Mr. Friedland envisioned could still be avoided. Most forecasting models, including the IEAassume that copper demand will remain stable outside of clean energy uses. Tom Price and Ben Davis of Liberum Capital, an investment bank, think it’s unlikely as China’s long construction boom is likely to be over. Expensive copper will also lead to a substitution: some maybes already use aluminum cabling. And McKinsey points out that new technologies — if realized to their full potential — could fill much of the supply gap this decade. There is time to avoid a train wreck. ■
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