Making headlines recently was Robert Friedland, the billionaire founder of Ivanhoe Mines Ltd and copper industry veteran, as he talked about “heading for a train wreck” and the potential for copper prices to go up 10 times as the mining industry struggles to expand ahead of accelerating demand.
There is no question that copper is set to be the next metal to benefit from the energy transition. Copper’s durability, superior electrical conductivity and reliability make it a major component in EVs, as a component in electric motors, batteries, inverters, wiring and in charging stations. According to the Copper Alliance, a pure electric vehicle can contain more than a mile of copper wiring in its stator windings.
Energy transition sceptics point to issues with risks around project life cycle numbers, as well as reliability and cost issues with replacement energy production. Whether you believe the transition will be near-term or longer-term, it is already happening and unless we see significant technology breakthroughs, it will need huge volumes of metals.
How does this impact copper globally?
The transport sector accounts for 22% of global emissions according to the IEA, and hence is a key focus in efforts by countries and companies to achieve net zero. Any increase in EV adoption drives copper demand.
According to Goldman Sachs research, EVs accounted for two-thirds of global copper demand growth last year, and are set to represent 27% of additional copper consumption over the rest of the decade. Their model suggests that without EV-related demand, the copper market would have been in surplus in 2022.
However, technology-based disruption may be coming. Energy guru, Tony Seba, uses the analogy that the Stone Age didn’t end because of a deficit in stones, it was disrupted by a superior technology – bronze. Relating this to transportation, the horse and carriage era didn’t end because of any issue with horse supply, it was disrupted by the invention and mass production of the internal combustion engine. We don’t know what is coming in the EV space, but history tells us that the current supply and demand forecasts may well be turned around in a short period.
What is happening with prices?
The copper price has moved between approximately US$0.62 per lb and US$4.70 lb since 2005, effectively range bound. It has not been a bad period price wise for copper producers with prices nearer the top of the range, then the bottom currently.
Macro conditions are surely helping – a Bloomberg analysis completed in 2017 showed that for every 1% rise in the consumer price index from 1992, copper prices rose an equivalent 18%.
Positively for the copper price, global head grades for producers have been in steady, slow decline, from about 1% in the 1980s to a current grade just above 0.6%, and major producing countries are moving up the sovereign risk table. Both these factors can tend to be price supportive, limiting supply, and of course, adding production risk. Which also tends to be longer term price supportive, due to investment and supply reduction.
Study the last couple of hundred years of commodity prices and you will find commodity prices oscillate just above and just below the marginal cost of production, there are brief periods of approximately four years in duration when commodity prices get misaligned between demand and supply and spike much higher, creating an incentive for increased production and supply and price then moves back to just above and just below the marginal cost of production again.
For much of the last decade new, major copper discoveries have been few and far between, copper exploration budgets are higher than in the early 2000s, but not compared to more distant eras, likely because a combination of ranging prices, higher sovereign risk, high inflation, and lower head grades have not set up a conducive environment for companies to invest.
Location, deposit size and grade are likely to remain in as much focus for companies and investors, as the demand drivers of the energy transition. If a mine can make a good profit at the current copper price, then that is the only thing that is real.
With most major copper forecasts escalating the size of the copper deficit going forward, and absent any major technological breakthrough, there is plenty to remain bullish about for copper explorers and producers.
Thanks to Andrew Quin for copper pricing and industry commentary.
White Noise communications is provided a fee for service working with companies which may have exposure to commodities or securities mentioned in these articles. All articles are the opinion of the author and are not endorsed by, or written in collaboration with, our clients.