Why is copper such a hot metal right now?
Growing global demand, climate change mandates, and a challenging supply scenario indicate a potential multi-year bull market
When compared to lithium, vanadium, and cobalt, copper may not be the sexiest metal in the green revolution, but the facts and figures point towards a multi-year bull market.
In 2021, cooper made history by hitting its highest level ever in Q2, with prices rallying above U.S.$10,700 per tonne as the world slowly regained its footing from the pandemic and top consumer China staged an economic rebound. The red metal then continued to trade above U.S.$9,000 per tonne for most of the year, and prices are expected to hold steady at U.S.$9,813 per tonne this year, dipping to U.S.$8,375 per tonne in 2023, according to The Bank of America.
Copper’s diverse utility was first recognized more than 10,000 years ago and it’s proving to be a game changer in the electrification of our future. According to the U.S. Geological Survey, copper is currently the third most consumed industrial metal in the world. A surge in funding available to foster green innovation combined with dwindling global production and disruptions in top producers Chile and Peru, means copper’s future is looking bright for years to come, particularly for junior miners with projects in place operating in countries like the U.S., Canada, and Australia.
Add in Biden’s Build Back Better framework and China’s Belt and Road Initiative, and copper becomes a thrilling investment theme. Referencing copper’s supply and demand situation, a metals strategist at Goldman Sachs said “copper is the new oil.” This sentiment was echoed by BlackRock’s global head of thematic and sector-based investing, Evy Hambro, who said:
“We’ve got decades worth of high rates of investment in infrastructure as the world seeks to decarbonize. That’s a widely held consensual view. What we’re likely to see is strong demand that will keep prices at very good levels for the producers for many years into the future, and that could be decades.”
A global surge in red metal demand
Roughly 25 million metric tons of refined copper was consumed in 2020, and over the next 10 years, worldwide demand is expected to rise by 31%. Why the growth?
Considering that 72% of copper consumption resides in the power, utilities, and electrical products sector, there are many reasons behind the surge, but perhaps the most exciting part of the story comes down to the global commitment to fight climate change.
We’re seeing a significant spike in demand for energy efficient storage, green technology, and renewable solutions, that are all backed by a massive influx of capex. As an example, the COP26 coalition, a conglomerate of banks, insurers, and investors worth $130 trillion recently vowed to put combatting climate change at the centre of their work and gained firmer support for green investing.
Copper will play a big role in green tech and is a staple in 5G wireless, EVs, grid-scale energy storage systems, and renewable power plants. Over the next decade, as tens of millions of EVs hit the road, more copper will be needed to build and connect new power plants. This boom will also spur investments in copper battery foil.
Furthermore, wind and solar farms use an enormous amount of copper: according to the Copper Alliance, wind turbines require 2.5 – 6.4 tonnes of copper per MW for the generator, cabling, and transformers, while photovoltaic solar power systems use roughly 5.5 tonnes of copper per MW.
Renewable energy uses significantly more copper per megawatt hour of power generated when compared to coal or nuclear power. According to market research analyst Fitch Solutions, renewable energy will be the dominant contributor to green copper demand, accounting for an average of 62% of annual demand between 2021 and 2030. The firm is so confident in this green metal that copper recently made its way on to Fitch Solutions’ list of commodities of the future.
If we’re talking about copper, we can’t forget its role in computer technology advancements. According to Moore’s Law, we can expect the speed and capability of our computers to increase every couple of years, leading to exponential growth. We’re already seeing IBM and other hardware goliaths choosing copper over aluminum to manufacture super powerful computer chips.
Copper’s superior electrical conductivity results in much faster operating speeds and greater circuit integration – 400 million transistors can now be packed onto a single chip while power requirements are reduced to less than 1.8 volts. The use of copper conductors in the chip is considered the last link of the copper computer chain, as it’s also used in external cables and connectors, bus ways, printed circuit boards, sockets, and leadframes.
Beyond computers, copper is also an essential component in new infrastructure and electrical grid build-outs. It’s no secret that the U.S. requires a staggering level of infrastructure upgrades, and copper will take centre stage. Plus, there’s a growing demand for eco-friendly homes and places like California are requiring new homes to include solar panels. Copper also fortifies homes: copper shingles and other house-related applications are fire resistant, built to endure harsh weather, and can last up to 100 years.
The red metal also strongly underpins all things transportation-related. Today’s transportation by land, sea, and air is faster and safer than ever, in part due to copper alloy’s high conductivity and strength which lends itself to the manufacturing of motors and wiring, springs, steering systems, avionics and many other applications.
Modern aircrafts require reduced weight and fuel output, which is made possible through computer-operated systems that leverage electronic signals transmitted by copper. Modern trains also rely on electricity supplied by copper cables and overhead conductor wires. The most powerful trains manufactured by GE and GM use about 16,000 pounds of copper.
East Meets West
A discussion of booming copper demand is not complete without mentioning two of the biggest infrastructure initiatives in history that are happening right now – Biden’s Build Back Better and China’s Belt and Road. According to the International Copper Association, the multi-trillion-dollar Belt and Road Initiative (BRI) is so immense, it could single-handedly result in global demand for copper rising 22% by 2027. Traversing several continents, BRI includes major projects across 71 countries, and it’s rumoured that Chinese firms have secured more than $340 billion in construction contracts.
Cooper demand will be driven upwards by new project construction, particularly with regards to power and transportation infrastructure, increased power purchasing across connected nations, and the use of copper-dependent applications in project development including HVAC units and EVs.
Multinational mining company Anglo American has estimated that by 2030, BRI will require an additional 5.6 million tonnes of production capacity to meet growing demand.
On the other side of the world, Biden’s Build Back Better legislation has earmarked $555 billion to tackle the U.S.’s most significant sources of global heating gasses – energy and transportation – through a variety of grants, tax incentives, and other policies aimed at fostering renewable energy technologies and major investments in EVs and public transit services. The legislation will incentivize zero emission public transit, a national network of electric vehicle chargers, and a renewable energy grid.
And that means… you guessed it… the country will need more copper.
The role of China in the copper boom
While we’re on the topic of China, its worth noting that the country currently consumes nearly 14 million tonnes of copper per year which is more than the rest of the world combined.
According to the MIT Energy Initiative, China recently imposed a mandate on automakers requiring that EVs make up 40% of all sales by 2030, while Beijing is working on plans to eventually ban the sale of fossil fuel-powered vehicles. Many other countries are following suit including Germany, France, Norway, the U.K., and India.
The implications of this will be felt on a global scale as these mandates will drive up the production of EVs and batteries to the point that the cost of both will decline worldwide. Furthermore, offset benefits related to air pollution, human health, climate change, and national security may be significant enough to offset production costs.
China is currently in the second phase of its adoption which includes credit percentage targets for car manufacturers that will increase from 14% in 2021 to 18% in 2023. The Phase 2 policy also reduces the maximum New Energy Vehicle (NEV) credit per vehicle and tightens the technical requirements for determining credit value.
Like the rest of the world, these mandates will create a supply challenge for China. In addition to foreign investments in mining projects around the world, China has spent more than $16 billion in the last 12 years to acquire overseas copper companies and assets. 40% of the country’s copper needs are currently met by Chinese-owned mines in Africa and other parts of the world, which has more than doubled in the past decade. However, even with these assets in place, domestic supply in China last year hovered around just two million tonnes including scrap, while mined copper production continues to struggle.
Will demand outpace supply?
Supplying the anticipated growth in demand could be constrained by declining ore grades, lack of investment in new mines, political instability in copper producing countries, and the ample time required to bring new discoveries into production. Supply and demand could level out, however, if the uptake of EVs and green tech is slower than anticipated or if a trade war erupts between the U.S. and China.
According to Nornickel, the world’s largest producer of high-grade nickel and a major producer of platinum and copper, the copper market will experience a mild deficit of 82kt this year, even though global mine production is expected to increase by 4%. This projected increase is attributable to the ramp-up of new mines in the Democratic Republic of the Congo (DRC) and Peru as well as the expansion of existing projects.
However, the company estimates that the current number of probable copper mining projects is not sufficient to meet future demand and the market could slide into a sizeable deficit, if no new projects are started in the next few years.
According to a recent article, copper stocks are approaching historically low levels, with only 200,402 tonnes of available inventory held by the LME, COMEX and SHFE, with New York responsible for more than half the total. This inventory doesn’t even cover three days of global consumption which surpassed 30 million tonnes for the first time last year. Many market watchers predict that supply will only continue to tighten over the coming decades.
The top four copper producing countries in the world are Chile, Peru, China, and the DRC, with Chile and Peru accounting for nearly 40% of the world’s primary mine supply. There’s some big projects and expansions happening including Kamoa Kakula in the DRC, Grasberg in Indonesia, and Spence in Chile.
These projects will be followed by some medium-sized mines in Chile and Peru: this year, Anglo American will start production at the Quellaveco mine in Peru which will produce 300,000 tonnes of copper, and Teck Resources will be starting up Quebrada Blanca Phase 2, a project that will be watched closely. China is also in the process of building new copper mines.
Though South America has the largest copper pipeline, projects are often vulnerable to water scarcity, environmental challenges, political instability, and resistance from local communities. These obstacles make it difficult for both majors and juniors to develop projects, with supply from Peru especially impacted. Antamina, a large open pit mining operation in Peru halted production, and the Las Bambas mine had temporarily suspended output due to protesters forming road blockades.
As a result, projects in the U.S., Canada, and Australia are becoming highly sought after, and the next few years will see exciting opportunities open up for juniors that have copper projects in place with strong upside potential.
The current production landscape
The updated list can be seen on Visual Capitalist: https://www.mining.com/web/the-largest-copper-mines-in-the-world-by-capacity
Where lies the opportunity?
This is a lot of information to absorb, and you may now be asking: how do I take advantage? Do I buy a producer or an explorer? Should I buy the commodity or the company? These two key questions reflect your risk tolerance and your potential gain.
For the experienced investor, buying a commodity on the futures market can be a great strategy, but it’s aggressive, needs to be managed actively, and because of its natural leverage ability, is not suitable for most investors.
A lower risk alternative might be to buy the Index. There are several metals and mining ETFs, most notably the S&P/TSX Global Base Metals Index, comprised of four ETFs that trade on the TSX. These include the Claymore Global Mining ETF, the Claymore Global Mining ETF Advisor Class, the Horizons BetaPro Global Base Metals Bull + ETF, and the Horizons BetaPro Global Base Metals Bear + ETF.
ETFs are great in theory, but it’s a passive investment strategy that doesn’t pack a punch in terms of return. Most investors are looking to achieve growth which is only attainable by taking a certain level of risk. This brings us to stocks: a wise approach for retail investors, but do we look at producers or project generators? Currently, an opportunity presents itself in both but given all the data, the length of the downturn in the mining cycle, and the amount of current drilling that’s ongoing, a focus on junior miners offers the best option for maximum growth.
In Canada, there are some big operations to consider and a lot of activity happening in B.C. This includes Copper Mountain Mining Corporation’s (TSX:CMMC) Copper Mountain mine, of which the company holds a 75% stake, with the remainder owned by Mitsubishi (TSE:8058).
Imperial Metals (TSX:III) runs the 30,000-tonne-per-day Red Chris copper mine, and also restarted operations at its Mount Polley copper-gold mine.
KGHM (KGH) is one of the largest copper-mining companies in the world and is currently developing the Ajax project, an open-pit, copper-gold mine.
Taseko Mines (TSX:TKO) holds the B.C.-based Gibraltar mine, the second largest open-pit copper-molybdenum mine in Canada, while Teck Resources (TSX:TECK) majority owns and operates the Highland Valley copper mine.
It’s also worth considering project generators that collect data, do their research, and put boots on the ground to find and develop new projects. These companies typically seek to hand-off projects in the form of buyouts or takeovers after they’ve located the resource. They play a crucial role in technology development, meeting carbon quotas, and creating a greener future.
But more on that next time. For now, I hope I’ve stimulated your interest in the many opportunities that present themselves as this red metal heats up and plays a starring role in our green tech future, not to mention, multi trillion-dollar infrastructure initiatives.