More than ever, the world is dependent on copper to transmit the electricity that drives economies.
Traditional key demand drivers for the red metal – global population growth and urbanization – have continued even with the Covid-19 situation. However, a new growth layer is rapidly emerging in the form of major new investment in the green economy. Governments the world over do not just consider decarbonization as a means to combat climate change, they view it as critical to restarting their ailing economies.
That’s where copper – the original electric metal – starts to shine. Electric vehicles (EV), EV charge stations, renewable energy installations, battery storage… these have all helped increase the requirement for copper in the past year.
The world was already trending towards decarbonization prior to the pandemic but the events of the past eighteen months have supercharged the drive to move away from fossil fuels.
Unsurprisingly, analysts expect copper demand to more than double by 2050 and whereas the copper price was previously rising at about 3-3.5% annually, it now looks as if that percentage might be higher at around 4.5-5%.
Despite the rosy outlook, the reality is the past ten years have generally been a bear market for copper caused by an acute oversupply. The origins of the surplus copper units resulted from an overreaction among miners to the Chinese commodity supercycle.
Miners opened their chequebooks in a hurry to get in on the seemingly never-ending demand from China’s unprecedented infrastructure buildout. However, following the Great Financial Crisis of 2008 and slowing growth in China in the 2010s, the market became awash with surplus copper.
The copper price fell from US$4.50 in 2012 to $2.00 in 2015, hitting the same low again in March 2020 as the world paused to take stock of the pandemic.
Most new copper deposits with economic assessments require a sustained price of around $3.50/lb to justify the capital expenditure. With prices languishing low for so long, most major mining companies stopped building new copper mines and delayed planned expansions.
Now, add to that mix the rising cost and complexity of finding ever more remote deposits, the associated high capital costs to get these deposits permitted, the increasing weight of social impacts, heightened sensitivities towards scarce resources such as water…. Suddenly it’s no surprise that the supply side of copper is ill equipped to meet forecast demand.
The Pipeline is all but Empty
After decades of underinvestment, the major, near-term development pipeline is bare. At the current rate, global copper output is estimated to peak in about 24 months, and most of the growth remaining is from high-risk projects in challenging jurisdictions.
Even historically reliable sources of copper, such as Chile, are now uncertain, given the considerable grade decline in its old mines and recent regional unrest.
A time is quickly approaching where there will not be enough new copper supply coming down the supply chain to meet all that new demand. Prices have to go up, and we’ve seen it happen in recent months. Over the past 12 months, the copper price has more than doubled from around $2.00/lb, to a 10-year high of $4.30/lb in February.
Despite higher copper prices for the past nine months, that has not yet prompted companies like Rio Tinto to start building new mines. They are, almost certainly, trying to determine if prices will stay at these levels long enough to incentivize development and perhaps even justify mergers and acquisitions.
The growth looks set to stay. So, should investment in new production be kicked further down the road, it seems likely to only sharpen the curve where upwards-bound copper prices are concerned.
We’ve already seen the equities of several promising copper companies rise in value on the stock exchanges but there are still no indications of genuine, imminent action by the mining industry. Thus, for anyone looking to cash in on the economic growth promised by the green economy, companies with strong copper assets have the potential to deliver a substantial return on investment.
Anthony Milewski
About Anthony Milewski
Mr. Anthony Milewski is the Chairman of Nickel 28 Capital Corp. He has spent his career in various aspects of the mining industry, including as a company director, advisor, founder and investor. In particular, he has been active in the commodities related to decarbonization and the energy transition, including nickel, cobalt, copper and carbon credits. Anthony has served on the London Metals Exchange Cobalt Committee, which includes representatives from the largest mining and commodities companies globally, to represent the interests of the industry to the board of directors the LME. Anthony Milewski previously worked at Renaissance Capital and Skadden, Arps, Slate, Meagher & Flom LLP in Moscow, where he focused on advisory and transactional work in metals & mining and oil & gas sectors. He has lived and worked in Africa and Russia, including a year as a Fulbright scholar, and has spent considerable time in Central Asia. Mr. Milewski holds a B.A. in Russian history from Brigham Young University, an M.A. in Russian and Central Asian Studies from the University of Washington, and a J.D. from the University of Washington.
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