Why Investors Are Selling Copper and How a Looming Shortage Will Affect the Economy

The price of copper – used in everything from computer chips and toasters to power systems and air conditioners – has fallen nearly a third since March. Investors are selling because they fear a global recession will dampen demand for a metal synonymous with growth and expansion.

You wouldn’t know it looking at the market today, but some of the biggest miners and metals traders are warning that in just a few years, a massive deficit will emerge for the world’s most critical metal – one that could itself- even stunting global growth, fueling inflation by increasing manufacturing costs, and derailing global climate goals.

The recent downturn and subsequent underinvestment is only making the situation worse.

“We’re going to look back to 2022 and think, ‘Oops,'” said John LaForge, head of real assets strategy at Wells Fargo.

“The market only reflects immediate concerns. But if you really think about the future, you can see that the world is clearly changing. It’s going to be electrified and it’s going to take a lot of copper. »

Stocks tracked by trade are near historic lows. And the latest price volatility means that new mining production – which is already expected to start running out in 2024 – could become even tighter in the near future.

Just days ago, mining giant Newmont shelved plans for a $2 billion gold and copper project in Peru. Freeport-McMoRan, the world’s largest publicly traded copper supplier, warned that prices are now insufficient to support new investment.

Commodity experts have been warning of a potential copper crisis for months, if not years. And the latest market downturn is likely to exacerbate future supply problems – providing a false sense of security, stifling cash flow and chilling investment. It takes at least 10 years to develop a new mine and operate it, which means that the decisions producers make today will help determine supplies for at least a decade.

“Major investment in copper requires a good price, or at least a good long-term copper price,” Rio Tinto group chief executive Jakob Stausholm said this week in New York.

Copper is essential to modern life. There are about 30 kilograms in an average car and more than 180 kg go into a single family home.

Metal, considered the benchmark for conducting electricity, is also the key to a greener world. While much of the attention has focused on lithium – a key component of today’s batteries – the energy transition will be fueled by a variety of raw materials, including nickel, cobalt and steel.

When it comes to copper, millions of meters of copper cabling will be crucial to bolstering global power grids, and tons and tons will be needed to build wind and solar farms. According to the Copper Alliance, electric vehicles consume more than twice as much copper as gas-powered cars.

As the world goes electric, net zero emissions goals will double metal demand to 50 million metric tons per year by 2035, according to an industry-funded study by S&P Global.

Although this forecast is largely speculative given that copper cannot be consumed if it is not available, other analyzes also indicate the potential for an increase. BloombergNEF estimates that demand will increase by more than 50% between 2022 and 2040.

Meanwhile, mining supply growth will peak around 2024, with a dearth of new projects underway and as existing sources dry up. This sets up a scenario in which the world could experience a historic deficit of up to 10 million tonnes in 2035, according to research by S&P Global.

The Goldman Sachs group estimates that miners will need to spend around $150 billion over the next decade to solve an eight million tonne shortfall, according to a report released this month. BloombergNEF predicts that by 2040, the mined production gap could reach 14 million tonnes, which should be filled by metal recycling.

To put the magnitude of this shortage into perspective, consider that in 2021, the global deficit stood at 441,000 tonnes, or less than 2% of refined metal demand, according to the International Copper Study Group. This was enough to cause prices to jump about 25% that year. S&P Global’s current worst-case projections show that the 2035 deficit will be about 20% of consumption.

What does this mean for prices?

“It’s going to get extreme,” said Mike Jones, who has spent more than three decades in the metals industry and is now the managing director of Los Andes Copper, a mining exploration and development company.

Goldman Sachs expects the London Metal Exchange benchmark price to nearly double to an annual average of $15,000 per tonne in 2025.

“All signs of supply point to a pretty rough road if producers don’t start building mines,” said Piotr Kulas, senior base metals analyst at CRU Group, a research firm.

Of course, all of these mega-demand predictions are premised on the idea that governments will continue to push forward with the net zero goals desperately needed to combat climate change. But the political landscape could change, and that would mean a very different scenario for the use of metals (and the planet).

And there’s also a common adage in commodity markets that could come into play: high prices are the cure for high prices. Although copper has fallen from the record high in March, it is still trading around 15% above its 10-year average. If prices continue to climb, it will eventually push clean energy industries to devise ways to reduce metal consumption or even research alternatives, according to Ken Hoffman, co-director of the EV Battery Materials Research Group at McKinsey.

Scrap metal supplies can help fill gaps in mining production, especially as prices rise, which will “bring more recycled metals into the market,” said BloombergNEF analyst Sung Choi.

S&P Global points out that as more copper is used in the energy transition, it will also open up more “recycling opportunities”, such as when electric vehicles are scrapped.

The current global economic malaise also underscores why the chief economist of BHP Group, the world’s largest miner, said this month that copper was on a “bumpy” trajectory due to demand issues. Citigroup sees copper falling in the coming months on a recession, particularly driven by Europe. The bank has a forecast of $6,600 in the first quarter of 2023.

And the demand outlook from China, the world’s largest consumer of metals, will also be a key driver.

If China’s real estate sector contracts significantly, “that’s structurally less demand for copper,” said Timna Tanners, an analyst at Wolfe Research.

“To me, it’s just a big offset” to consumption forecasts based on net-zero goals, she said.

But even a recession will only mean a lag for demand, and it won’t “significantly” affect consumption projections through 2040, according to BloombergNEF. Indeed, much of future demand is “legislated”, thanks to governments’ emphasis on green goals, making copper less dependent on the wider global economy than before, said Mr. LaForge from Wells Fargo.

Moreover, there is little wiggle room on the supply side of the equation. The physical copper market is already so stretched that despite falling futures prices, premiums paid for immediate delivery of the metal have increased.

What’s holding back supply?

Take a look at what’s happening in Chile, the legendary mining nation that has long been the world’s largest supplier of metal. Revenues from copper exports are down due to production difficulties.

In mature mines, the quality of the ore deteriorates, which means production slips or more rock has to be processed to produce the same amount. Meanwhile, the industry’s pipeline of committed projects is drying up. New deposits are becoming increasingly difficult and expensive to find and develop.

In Peru and Chile, which together account for more than a third of global production, some mining investment has stagnated, in part amid regulatory uncertainty as politicians seek a bigger share of profits to address economic inequality. .

A worker among copper crucibles at the foundry of the Chuquicamata copper mine in Chile.  AFP

Soaring inflation also pushes up production costs. That means the average incentive price, or the value needed to make mining attractive, is now about 30% higher than it was in 2018, at about $9,000 a ton, according to Goldman Sachs.

Globally, supplies are already so tight that producers are trying to extract tiny nuggets from unwanted tailings. In the United States, businesses are running into roadblocks. In Congo, weak infrastructure limits the growth potential of large deposits.

And then there’s this big contradiction when it comes to copper: the metal is essential for a greener world, but extracting it from the earth can be a pretty dirty process. At a time when everyone from local communities to global supply chain managers are stepping up their scrutiny of environmental and social issues, it is becoming increasingly difficult to secure approvals for new projects.

The cyclical nature of commodity industries also means that producers face pressure to maintain strong balance sheets and reward investors, rather than aggressively rushing into growth.

“The incentive to use cash flow for return on capital rather than for investment in new mines is a key driver leading to a shortage of the raw materials the world needs to decarbonize,” analysts said. Jefferies Group in a report this month.

Even if producers shift gears and suddenly start pumping money into new projects, the mines’ long lead time means supply prospects are all but locked in for the next decade.

Updated: September 24, 2022, 5:00 a.m.

About Keith Tatum

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