I began writing a piece on the October copper market mini-crisis, but thought better to break it up and deliver a primer first. This post will focus on fundamentals for the base metal. I will then follow up with a Part 2 outlining how the largest metal exchange was almost completely drained of supply. Let’s talk copper!
Copper Supply
There are around 250 copper mines in the world with annual production of 20 million tonnes. The jurisdictions dominating copper mining are located in South America: Chile and Peru. These two countries account for roughly 40% of the globe’s yearly new copper supply.1
The fundamentals of copper are very promising. The ever-arduous process of securing mining permits makes the endeavor incredibly resource intensive. The political constraints limiting additional mines serves as an artificial hurdle for greenfield, or new, projects coming online. The average lead time from discovery of a deposit to a productive mine is 14 years. Looking forward to 2030, the overall copper market is expected to be at a -4.7 million tonne deficit.2 Such conditions create a natural buoyancy to the metal price itself as new supply is not readily available.
Mining is a very tough business. Environmental concerns are ever at the forefront blockading many projects. With ESG investing, or Environmental/Social/Governance, the focus of capital markets has shifted towards emphasizing “social responsibility” rather than profitable enterprises. As a result, capital is shied away from “dirty” industries like mining. Many oil companies are succumbing to the trend as banks close their doors to fossil fuels.
These conditions are favorable for copper fundamentals as mines face regulatory headwinds. Ironically, the only way the “green revolution” can continue is with copper—and with that, more copper mines.
Copper Demand
On the demand side copper is seeing explosive growth. Electrification is the buzz word as consumers look to transition towards batteries and electric motors. Heavy subsidies are pushing automobile manufacturers to race and cash in on electric vehicles. Every major car company is announcing new model lines, or outright converting existing ones to hybrid or fully electric. This places increased need for more copper supply.
Political forces drive the transition of our liquid fuels industries to battery alternatives. An electric car utilizes about 4-5x the amount of copper of a traditional gas-burner.3 Projections for 2021 EV sales are 5.6 million units globally with explosive growth expected to continue.4 This is copper’s time to shine.
Additionally, some areas in the US are pushing electrification of buildings. This is driven to reduce carbon dioxide emissions. In New York City, they just mandated most new construction starting in 2027 may no longer have natural gas hook-ups for heating or cooking.5 Seattle has passed similar measures earlier in 2021.6 Gas water heaters are being replaced with electric across the country.
Electrification is everywhere in home improvement stores. Electric mowers and hand tools are commonplace. The gradual adoption and transition from gas-powered products is yet further evidence of the growing trend. Copper makes this possible.
Utility-scale battery storage is another demand driver. Municipalities across the country, and world, have diesel generators—some dating back to World War II—as emergency backups if a town loses power. These diesel units will be replaced in the coming years with battery alternatives.
Renewables will be paired with these battery packs to smooth out the inherent intermittency of wind and solar—the output tends to come and go. Batteries solve much of this problem by smoothing out power production curves. Instead of sporadic bursts of wind output all at once, a battery can act as a load and absorb excess generation. This can then be discharged at other points in the day when there’s a lull in renewable production. Essentially, batteries transmute a glut of wind production to other times when there’s a deficit. A single 3 megawatt wind turbine contains up to 4.7 tons of copper and they’re building them like crazy.7
Conclusion
Given the current setup, the copper market is primed for a secular bull market. The amount of money spent globally is incredible. Entire industries are being converted towards electrification. All paths lead back to copper.
The problem is while copper is not rare, the political appetite for new mines is. In the years ahead, we will face supply bottlenecks endangering the aggressive all-out push for electrification. The way the market solves this conundrum is through price. Substitution with alternative metals will be done, but that is limited. Copper recycling will continue to be lucrative, but lacking. Inevitably, we need to find more metal. Miners will be well-compensated for their reserves enticing further exploration and development. While it’s a lengthy process—14 years on average—to bring a copper discovery to production, the political permitting process will need to be reformed. And it will.
NS Energy. May 20, 2021. Profiling the world’s top five copper mining countries in 2020. https://www.nsenergybusiness.com/news/top-five-copper-mining-countries/
Atwood, James. March 19, 2021. The World Will Need 10 Million Tons More Copper to Meet Demand. Bloomberg. https://www.bloomberg.com/news/articles/2021-03-19/the-world-will-need-10-million-tons-more-copper-to-meet-demand
Copper.org. Retrieved December 20, 2021. How Copper Drives Electric Vehicles. https://www.copper.org/publications/pub_list/pdf/A6192_ElectricVehicles-Infographic.pdf
Walton, Robert. November 12, 2021. Global EV sales rise 80% in 2021 as automakers including Ford, GM commit to zero emissions: BNEF. Utility Dive. https://www.utilitydive.com/news/global-ev-sales-rise-80-in-2021-as-automakers-including-ford-gm-commit-t/609949/
Newburger, Emma. December 15, 2021. New York City is banning natural gas hookups for new buildings to fight climate change. CNBC. https://www.cnbc.com/amp/2021/12/15/new-york-city-is-banning-natural-gas-hookups-for-new-buildings.html
DiChristopher, Tom. February 2, 2021. Seattle City Council votes to restrict natural gas use in new buildings. S&P Global Market Intelligence. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/seattle-city-council-votes-to-restrict-natural-gas-use-in-new-buildings-62423210
Copper.org. Retrieved December 20, 2021. Copper and the Clean Energy Transition. https://www.copper.org/resources/market_data/infographics/copper-and-the-clean-energy-transition-brochure.pdf