Commodities, Copper, Features

Copper on a knife-edge

Copper decarbonisation

Will the looming global copper shortage jeopardise the West’s decarbonisation priority?

This year has ushered in a global copper shortage, with a major deficit of 1.9 million tonnes (Mt) forecast by 2030. 

Due to the commodity’s expansive use in equipment and industrial machinery, copper has historically been a leading indicator for economic health. Material adjustments in the demand or supply of copper can therefore result in sustained economic distress, namely in the form of global inflationary pressures that are compelling central banks to maintain higher interest rates. 

But why is there a global shortage, and will this jeopardise the West’s decarbonisation priority? 

Copper was the key element for the Bronze Age (around 2000 BC to 700 BC) and arguably the first major inflection after the Agricultural Revolution (circa 10,000 BC). 

It is now being relied upon for the heavy lifting in the world’s decarbonisation efforts. Demand is expected to double from 25 million tonnes today to approximately 50 million tonnes by 2035 in order to deploy the technologies critical to achieving net-zero goals by 2050. 

These technologies, including electric vehicles (EV), batteries, solar panels and wind turbines, require up to 12 times more copper than their fossil-fuel counterparts. The EV ecosystem is only expected to expand, recording approximately 11 million sales in 2022, with a three-fold growth forecast of approximately 30 million units by 2028. 

The demand outlook for copper has also been affected by China’s recent plans to withdraw strict zero-COVID measures in an effort to prompt economic recovery. China already consumes 54 per cent of the world’s refined copper, and the recent spike in the country’s demand has placed upward pressure on prices. 

Recent political disarray has threatened 30 per cent of Peru’s copper supply.

Political unrest in South America, the backbone of global copper production, is placing further strain on supply streams. 

The Americas collectively host 75 per cent of the largest copper mines, with Chile the top producer (27 per cent of global copper production), followed by Peru (10 per cent), and the Demographic Republic of Congo alongside China (8 per cent). 

Recent political disarray has threatened 30 per cent of Peru’s copper supply. Multiple world-leading mines such as Glencore’s Antapaccay and MMG’s Las Bamba, which account for 2.5 per cent of global copper output, have been closed or restricted by protester roadblocks. 

Similarly, Chile’s rising inflation and unemployment have contributed to an increase in crime and protests are in favour of foreign-owned exporters, with new taxes introduced on miners. 

The disruptive effect of geopolitical upheaval remains a risk for future copper supply and, due to the dependency on South America’s production, this poses a threat to countries that rely on this commodity to meet sustainability targets. 

Despite the uncertainty, most short-term growth is expected to be derived from Chile and Peru. Global mined output is still expected to grow by 7.5 per cent in 2023 before moderating to 3.7 per cent in 2024, where output will sit at more than 24 million tonnes. 

Australian mining giants have been fully aware of the supply-and-demand predicament, with foresight to make acquisitions aimed at capitalising on growing copper demand. 

BHP announced the completion of the OZ Minerals acquisition in May, boosting its copper production by 7 per cent, while Rio Tinto made significant investments into copper late last year, with a $2.2 billion acquisition of Turquoise Hill Resources.

While copper has played an essential role in many of the greatest green technological advancements, it isn’t deemed environmentally sustainable to mine. And increasingly tighter climate change regulations mean there are few incentives to start copper mines. 

This neglect to invest in new copper discovery means ageing mines are being exploited past their use-by date. 

It would appear rational for producers to capitalise on mismatched copper supply-and-demand dynamics, presenting a compelling opportunity for investors to act on battery metal growth and the decarbonisation narrative. However output is slipping as ore quality deteriorates. 

Over time, rather than new mining investments, we have utilised recycled copper inventories, which are now at record lows. 

The lack of inventories, the recent global infrastructure stimulus and demand from the EV sector are further posing a threat on the drawdown of inventories and the lack of supply to re-stock. In response, the global recycled copper market, estimated at $US238.61 billion in 2022, is now forecast to reach $US330.83 billion by 2028. 

Resources giants are now trying to secure the next generation of deposits. But even if copper producers and recyclers attempt to increase output as prices rise, there is no quick solution to ensure long-term supply. 

Therefore, a perennial production risk introduced by a critical supply gap looms, which is exacerbated by a 15–20 year timeframe between discovery and production for new copper deposits. 

Many major global copper producers also operate in highly regulated environments, further delaying approvals to start business. 

With the assumption that mining output continues to grow at a rate of 2.69 per cent annually, global output will reach approximately 31 million tonnes by 2035, short of the 50 million tonnes we expect to be needed. The supply-and-demand gap is likely to continue widening. 

This leaves increasing existing mine output and copper recycling as the main sources of additional supply. 

Chile, the longest country in the world, is also the world’s largest copper-producing nation.

But what other solutions exist to bridge the supply gap? 

The adoption of emerging technologies, including coarse particle recovery, sulphide leaching, and process optimisation with machine learning, can improve productivity, reduce inputs like water and electricity, and open new opportunities to process orebodies that wouldn’t be otherwise economical. 

These technologies are particularly important in Chile and Peru, where local operations are dealing with lower ore grades, water scarcity, and a push to lower environmental footprints, while simultaneously generating economic value. 

In many ways, South America is ground zero for the next stage of technology that will be used to increase production and meet future copper demand.

The economic impact of this critical supply gap is sustained inflation, placing growing price pressure on electronics and construction materials. Consequently, central banks continue to tighten monetary policy, placing a pinch on cost-of-living conditions. 

The RBA’s move in May to lift the cash rate by 25 basis points – to 3.85 – in an effort to bring inflation within its target rate of 2–3 per cent is a significant by-product of ongoing commodity supply shortages. The cash rate has since increased to 4.10.

Until resolved, the cost of materials such as computer chips, toasters and power systems that rely on copper inputs is likely to remain high. Copper is also proving to be one of the most capital-intensive resource industries on the ASX, which is taking a significant toll on company cashflows.

While the copper shortage is a short-to-medium-term economic concern, the disequilibrium between copper supply and demand presents future opportunities for Australia. 

But despite this opportunity, copper is not named on the Australian Government’s list of 26 critical minerals, demonstrating a lack of awareness regarding its role among other commodities key to the green transition. 

Australia is currently the world’s sixth largest copper producer, recording $12 billion in exports in 2021–22, and houses the second largest copper reserves in the world. 

Its geopolitical safety and resource potential means Australia can support global energy security and strategically place itself as a renewable energy superpower. This will enable the country to capitalise on future demand growth, increase export revenue and boost employment and economic growth. 

This feature appeared in June–July edition of Australian Resources & Investment.

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