A Great Copper Squeeze Is Coming to the Global Economy

A Great Copper Squeeze Is Coming to the Global Economy

(Bloomberg) — The price of copper — used in everything from computer chips and toasters to power systems and air conditioners — has fallen by nearly a third since March. Investors are selling on fears that a global recession will halt demand for a metal synonymous with growth and expansion.

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You wouldn’t know it from looking at the market today, but some of the biggest miners and metals traders are warning that in a few years a huge deficit will emerge for the world’s most important metals – one that could be itself. stop global growth, curb inflation by raising manufacturing costs and throw out global climate goals. The recent downturn and the resulting underinvestment threaten to make it worse.

“We’ll look back at 2022 and think, ‘Oops,'” said John LaForge, head of real asset strategy at Wells Fargo. “The market is only reflecting the immediate concerns. But if you really thought about the future, you can see that the world is clearly changing. It will be electrified, and it will need a lot of copper.”

Inventories tracked by trade exchanges are near historic lows. And the latest price volatility means that new mine output – which is projected to start starting in 2024 – could be even tighter in the near future. Just a day ago, the mining giant Newmont Corp. plans available for a $2 billion gold and copper project in Peru. Freeport-McMoRan Inc., the world’s largest publicly traded copper supplier, has warned that prices are now “insufficient” to support new investments.

Commodity experts have been warning of a potential copper crunch for months, if not years. And the latest market downturn will stand to exacerbate future supply problems – by offering a false sense of security, choking cash flow and chilling investments. It takes at least 10 years to develop a new mine and bring it on line, meaning the decisions producers are making today will help determine supplies for at least a decade.

“A significant investment in copper requires a good price, or at least a perceived good long-term copper price,” Rio Tinto Group CEO Jakob Stausholm said in an interview this week in New York.

Why Is Copper Important?

Copper is essential to modern life. The average car weighs about 65 pounds (30 kilograms), and a single-family home weighs more than 400 pounds.

The metal, considered the benchmark for conducting electricity, is also vital to a greener world. While much of the attention has focused on lithium – a key component in today’s batteries – the energy transition will be powered by a variety of raw materials, including nickel, cobalt and steel. When it comes to copper, millions of feet of copper wiring will be critical to strengthening the world’s power grids, and tons upon tons will be needed to build wind and solar farms. Electric vehicles use more than twice as much copper as gasoline-powered cars, according to the Copper Coalition.

How Big Will the Shortage Succeed?

As the world goes electric, net-zero emissions goals will double demand for the metal to 50 million metric tons annually by 2035, according to an industry-funded study from S&P Global. While that forecast is largely hypothetical given all that copper can’t be spent if it’s not available, other analyzes also point to the potential for a boom. BloombergNEF estimates that demand will increase by more than 50% from 2022 to 2040.

Meanwhile, mine supply growth will peak around 2024, with a dearth of new projects in the works and as existing sources decline. That sets up a scenario where the world could see a historic deficit of as much as 10 million tonnes in 2035, according to S&P Global research. Goldman Sachs Group Inc. considers miners need to spend about $150 billion over the next decade to solve an 8 million ton deficit, according to a report published this month. BloombergNEF predicts that the mining output gap could reach 14 million tonnes by 2040, which would have to be filled by recycling metals.

To put into perspective how big that shortage would be, consider that the global shortfall came in at 441,000 tonnes in 2021, representing less than 2% of refined metal demand, according to the International Copper Study Group. That was enough to send prices jumping by about 25% that year. The current worst projections from S&P Global show that the 2035 deficit will be equal to about 20% of consumption.

As for what that means for prices?

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

Where are Headline Prices?

Goldman Sachs has predicted that the benchmark London Metal Exchange price will almost double to an annual average of $15,000 per tonne in 2025. On Wednesday, copper settled at $7,690 per tonne on the LME.

“All the signs on supply are pointing to a fairly rocky road unless producers start building mines,” said Piotr Kulas, senior base metals analyst at CRU Group, a research firm.

Of course, all those mega-demand forecasts are predicated on the idea that governments will continue to press ahead with the much-needed net-zero targets 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 is also a common adage in emerging commodity markets: high prices are the cure for high prices. Although copper has fallen since the March record, it is still trading about 15% above its 10-year average. If prices continue to climb, that will ultimately push clean energy industries to engineer ways to reduce metal consumption or even seek alternatives, according to Ken Hoffman, co-head of the EV battery materials research group at McKinsey & Co.

Scrap supply can help fill mine production gaps, especially as prices rise, which “will encourage more recycled metal to appear on the market,” said Sung Choi, an analyst at BloombergNEF. S&P Global points out that more copper will be used in the energy transition, which will also open up more “recycling opportunities”, such as when EVs are scrapped. Recycled production will account for about 22% of the total refined copper market by 2035, up from about 16% in 2021, S&P Global estimates.

The current global economic malaise also underlines why the chief economist of BHP Group, the world’s largest miner, said this month that copper faces a “bumpy” path ahead due to demand concerns. Citigroup Inc. sees copper falling in the coming months due to recession, especially driven by Europe. The bank has a forecast for $6,600 in the first quarter of 2023.

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

If China’s property sector declines significantly, “the demand for copper is structurally less,” said Timna Tanners, an analyst at Wolfe Research. “To me, that’s just an important offset” to the consumption forecasts based on net-zero targets, she said.

But even a recession will only mean a “slowdown” in demand, and will not “significantly dampen” consumption projections heading into 2040, according to a BloombergNEF presentation dated Aug. 31. “legislated in,” through the government’s focus on green targets, making copper less dependent on the broader global economy than it used to be, said LaForge of Wells Fargo.

In addition, there is not much wiggle room on the supply side of the equation. The physical copper market is already so tight that premiums paid for immediate delivery of the metal are increasing despite the slump in futures prices.

What is Keeping Supplies?

Look at what is happening in Chile, the legendary mining nation that has long been the world’s largest metal supplier. Revenues from copper exports are falling due to production struggles.

At mature mines, the quality of the ore is deteriorating, which means that output must be reduced or more rock processed to produce the same amount. And in the meantime the industry’s pipeline of committed projects is running dry. New deposits are becoming more difficult and expensive to find and develop. In Peru and Chile, which together account for more than a third of global output, some mining investments have stalled, partly amid regulatory uncertainty and politicians seeking a greater share of profits to address economic inequality. solution.

Soaring inflation is also driving up the cost of production. That means the average incentive price, or the value needed to make mining attractive, is about 30% higher than in 2018 at about $9,000 per ton, according to Goldman Sachs.

Around the world, supplies are already so tight that producers are trying to squeeze small nuggets out of scrap rock. In the United States, companies are starting to allow roadblocks. While in the Congo, poor infrastructure is limiting the growth potential for large deposits.

Read More: Largest US Copper Mine Shuts Down Over Sacred Land Dispute

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

The cyclical nature of commodity industries also means that producers are under pressure to keep their balance sheets strong and reward investors rather than aggressively grow.

“The incentive to use cash flows for capital returns rather than investment in new mines is a key factor leading to the scarcity of raw materials the world needs to decarbonize,” analysts at Jefferies Group LLC said in a report this month.

Even if producers shift gears and suddenly start pouring money into new projects, the long lead time for mines means the supply outlook is pretty much locked in for the next decade.

“The short-term situation is contributing to the stronger long-term outlook as it affects supply development,” Freeport-McMoRan CEO Richard Adkerson said in an interview. And in the meantime, “the world is becoming more electrified everywhere you look,” he said, ushering in a “new era of demand.”

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