The latest use for copper is in renewable energy, particularly in photovoltaic cells used for solar power, and wind turbines.
The adoption of smart grid technology in developed and developing countries will boost demand for copper strips used in switchgear, devices that protect equipment and circuits from power spikes. Copper is the conductor material used in transformer windings, strips and busbars. Both power and distribution transformers use copper strips.
Beyond the United States, there is China’s Belt and Road Initiative (BRI), consisting of a vast network of railways, pipelines, highways and ports that would extend west through the mountainous former Soviet republics and south to Pakistan, India and southeast Asia.
Research by the International Copper Association found BRI is likely to increase demand for copper in over 60 Eurasian countries to 6.5 million tonnes by 2027, a 22% increase from 2017 levels.
The base metal is also a key component of the global 5G buildout. Even though 5G is wireless, its deployment involves a lot more fiber and copper cable to connect equipment.
Another report by Roskill forecasts total copper consumption will exceed 43 million tonnes by 2035, driven by population and GDP growth, urbanization and electricity demand. Total world mine production in 2020 was only 20Mt. In many countries it takes 20 years to go from discovery through permitting to mining.
The big question is, will there be enough copper for future electrification and energy needs, globally? And remember, in addition to electrification, copper will still be required for all the standard uses, including copper wiring used in construction and telecommunications, copper piping, and copper needed for the core components of airplanes, trains, cars, trucks and boats.
The short answer is no, not without a massive acceleration of copper production worldwide.
As we have reported, without new capital investments, Commodities Research Unit (CRU) predicts global copper mined production will drop from the current 20 million tonnes to below 12Mt by 2034, leading to a supply shortfall of more than 15Mt. Over 200 copper mines are expected to run out of ore before 2035, with not enough new mines in the pipeline to take their place.
Some of the largest copper mines are seeing their reserves dwindle; they are having to dramatically slow production due to major capital-intensive projects to move operations from open pit to underground.
A recent report from Jefferies Research LLC concluded: “The copper market is heading into a multiyear period of deficits and high demand from deployment of renewable energy and electric vehicles.”
Tightening supply, combined with all the above-mentioned demand drivers, plus inflation expectations, are cranking up the copper price. On Monday, Feb. 22, copper vaulted over $9,000 a ton for the first time in nine years, moving closer to the all-time high of $10,190 reached in February, 2011.
The red metal is on track for an 11th straight monthly gain and has doubled in price since a mid-March 2020 low. In a telling sign of emerging tightness, spot copper contracts are trading in backwardation, ie., at a premium to futures, suggesting that spot demand is outpacing supply as London Metal Exchange inventories run low.
Citigroup is predicting an annual 500,000-tonne deficit, starting this year, with copper supply falling short of demand most years. Inventories in LME warehouses are currently near 2005 lows — when demand ran hot in the middle of the last commodities super-cycle.
Every investor should take a long hard look at the third chart below. There has been a long-term structural deficit in copper supply. When pent-up demand, and massive new demand as described above, meet structural unfixable long term supply deficits there is only one way for prices.
Conclusion
The price of copper has been rising along with a number of other metals including iron ore, zinc, and nickel, amid what some are calling a new super-cycle.
As supply disruptions and sustained demand from China continue to create practically ideal conditions for the mining industry, some companies are passing their profits on to shareholders.
BHP, the world’s largest mining firm, reportedly forecasted a “very constructive” outlook for commodities market fundamentals, and rewarded investors with a record interim dividend of US$1.01, up from $0.65 last year. Profit in the first half jumped 16%, to a 7-year high, owing to demand from top metals consumer China boosting iron ore prices by 70% in 2020.
The Anglo-Australian miner said if iron ore and copper prices maintain current levels, it would be able to slash its net debt. Glencore meanwhile will resume payouts, with a US$1.6 billion return to shareholders after scrapping its annual dividend last August.
Critically for AOTH purposes, though, the key statement came from BHP’s Vice President, Market Analysis & Economics, Huw McKay, who indicated the company sees continued need for additional supply, both new and replacement:
“Looking even further out, long term demand from traditional end–uses is expected to be solid, while broad exposure to the electrification mega–trend offers attractive upside,” BHP Vice President, Market Analysis & Economics, Huw McKay, wrote on Feb. 16.
Where is BHP likely to get this new supply? During the last super-cycle, mining majors like BHP, Rio Tinto, Glencore and others tried to increase output through mergers and acquisitions with other large mining companies or mid-tier producers. The strategy largely failed. A lot of M&A happened at the top of the market, with acquirers overpaying. When metals prices fell across the board, they were left holding the bag. Asset sales and multi-billion-dollar write downs ensued, which contributed to hundreds of millions of market value lost.
I’d like to think that the majors have learnt their lesson, and won’t “eat each other” again, in pursuit of higher production and reserves replacement. Mining companies know they need to get into long-life, scalable projects, with the capability of replacing their depleting reserves/ resources, that can be developed at reasonable cost to shareholders.
There has been a long-term structural deficit in copper supply. When pent-up demand, plus massive new demand meet structural, unfixable, long term supply deficits there is only one way for prices to go.
Every investor should take another look at the chart below.
Richard (Rick) Mills
aheadoftheherd.com
