Copper Market is a Coiled Spring / Commodities / Copper
As the thirdmost-consumed metal on earth, behind iron and aluminum, copper is all aroundus. Found naturally in the earth’s crust, copper was among the first metalsused by early humans, dating back to the 8th century, BC.
Three thousandyears later homo sapiens figured out how to smelt copper from its ore, and toalloy it with tin to create bronze. Bronze was useful for tools and weapons,making it one of the most important inventions in the history of civilization.Copper was later used in roofing, and still is, for its strength and oxidizedgreen look, as well as in works of art. Copper, or Cu, is also essentialfor all living organisms.
Demand
Just under halfof copper demand is for the electronics industry. The rest is used to feed arange of industrial machinery, vehicles and consumer products. For most, noother raw material can be substituted for copper.
According to a report by McKinsey Global Institute, primary copper demand could grow to 31 million tonnes by2035, a 43% increase over today’s 22 million tonnes (Mt). Total minedproduction in 2019 was just 20Mt, states the US Geological Survey. McKinsey predicts the majority of future demand will comefrom China, where per capita copper consumption will likely rise from 7.2kilograms per person to 11-12 kg by 2035.
Copper isuseful for electrical applications because it is an excellent conductor ofelectricity, and cheaper than gold or silver which are also conductors. That,combined with its corrosion resistance, ductility, malleability, and ability towork in a range of electrical networks, makes it ideal for wiring. Among theelectrical devices that use copper are computers, televisions, circuit boards,semiconductors, microwaves and fire prevention sprinkler systems.
Intelecommunications, copper is used in wiring for local area networks (LAN),modems and routers. While aluminum is preferred for overhead power transmissionlines, copper wires are used in medium-voltage distribution and low-voltageconnections.
Theconstruction industry would not exist without copper; it is essential forwiring in residential and commercial construction. The red metal is also usedfor potable water and heating systems due to its ability to resist the growthof water-borne organisms, as well as its resistance to heat corrosion.
Thetransportation industry is reliant on copper for core components of airplanes,trains, cars, trucks and boats. A commercial airliner has up to 190 kilometers of copperwiring, while high-speed trains use up to10 tonnes of copper per kilometer of track.
Automobileshave used copper and brass radiators and oil coolers since the 1970s. Most newvehicles need copper for on-board navigation, anti-lock braking systems, heatedseats, defrosting wires embedded in windows, hydraulic lines, and wiring forwindow and mirror controls.
Copper isdestined to play an essential role in the new “green” economy, especially theshift, one we believe is inevitable, from “ICE” vehicles powered by gasoline ordiesel fuel, to electric vehicles, hybrids and hydrogen fuel cell autos. Thisshift is being driven by the need to reduce global air emissions, whichscientists universally agree are contributing to global warming.
Copper isutilized in an electric vehicle’s electric motor and wiring. An EV has fourtimes as much copper as a fossil-fueled model. We also can’t forget residentialchargers and public charging stations which require a lot of copper -consultancy Wood Mackenzie estimates that by 2030 there will be more than 20million residential EV charging stations requiring 250% more copper. One of thelargest manufacturers of public charging stations is targeting a 50-foldincrease by 2025.
The IEA forecasts amore than quadrupling of EV sales in the next decade, from 5.1 million in 2018to 23 million in 2030. It is estimated the mining industry will need to produce5 million tonnes of copper a month by 2030, just to meet demand from EVs. Thatworks out to 3.1X the amount of copper that all of the world’s copper minesproduced each month of 2019.
A lot ofcopper is also expected to be required to generate and store electric power.There is a movement away from large, remote, utility-scale power plants,towards thousands of distributed energy sources (DERs) situated closer to endusers. These “microgrids” will be “smart”, in that data about generationand usage will stream back and forth between control centers and customers. Andmore microgrids will be hooked up to renewable energy sources like wind andsolar.
According to Copper.org, copper usage will dramatically increase at every level of the newelectrical grid and many microgrids.
Economicgrowth necessitates building more infrastructure to meet increasing demands onpower, heat, water, roads and the like. As populations grow, they need morehouses, hospitals, subway lines, roads, recreational facilities, sportsstadiums.
Yet around theworld, critical water and power infrastructure is failing and buildings, roadsand bridges are falling apart. Consider the amount of copper it will take tofix the estimated $94 trillion global infrastructure deficit.
A high-speedtrain network requires 10 tonnes per kilometer of track and powerful electriclocomotives contain over 8 tonnes of copper, according to the Copper Alliance. Newsubway and light-rail systems are badly needed to get motorists out of their cars.New buses are also in high demand. A hybrid electric bus has 89 kg of copper,and 224-369 kg goes into a battery-powered electric bus, depending on the sizeof the battery.
China’s Beltand Road Initiative (BRI) consists of a vast network of railways, pipelines,highways and ports that would extend west through the mountainous former Sovietrepublics and south to Pakistan, India and southeast Asia.
Research by the International Copper Association found BRI is likely to increase demand for copper in over60 Eurasian countries to 6.5 million tonnes by 2027, a 22% increase from 2017levels.
There’s alsothe global 5G buildout. Upgrading cellular networks from 4G to 5G is expectedto result in a vast improvement in service, including nearly 100% networkavailability, 1,000 times the bandwidth and 10 gigabit-per-second (Gbps)speeds. Even though 5G is wireless, its deployment involves a lot of fiber andcopper cable to connect equipment.
In Japan,demand for copper cables is seen growing 2.6% from 696,000 tonnes in 2018 to714,000t in 2022, and copper for rolled copper alloy products growing 6% to690,000t during the same period, according to the state-run Japan Oil, Gas andMetal National Corporation, or JOGMEC.
A report by Roskill forecaststotal copper consumption will exceed 43 million tonnes by 2035, driven bypopulation and GDP growth, urbanization and electricity demand. Electricvehicles and associated network infrastructure may contribute between 3.1 and4Mt of net growth by 2035, according to Roskill.
How on earthis copper going to satisfy all of the these demands on it, looking ahead 5, 10,20 years? Will the mining industry be able to find new mineral deposits toreplace the ones existing mines are depleting? Let alone find enough new coppertonnage required by vehicle electrification, energy storage, infrastructureupgrades, and an expanding developing world population that wants all of thecopper products we in the developed West take for granted and plan to keepbuying at first-world volumes?
To answer thatwe need to understand world copper supply, then match it with global demand andthe two headwinds we see temporarily holding back pent-up demand: the coronavirusand the (unresolved) US-China trade war.
Headwinds
On Jan. 15 theUnited States and China signed the first phase of a comprehensive trade deal, whichwent part-way towards ending the uncertainty the trade war, and its billionsworth of tit-for-tat tariffs, was having on the global economy. Prices of basemetals like zinc, copper and lead have been swiped to some extent by the tradewar, their declines made worse by slowed growth in China, the world’s largestcommodities consumer.
All three rosefor the first two weeks of January in anticipation of a trade deal, then fellabruptly following the start of the coronavirus. On Jan. 7 Chinese authoritiesidentified a new virus characterized by the WHO as 2019-nCoV, followed on Jan.11 by the first death in Wuhan, the epicenter of the outbreak.
Since then thecoronavirus has killed about 630 people, the majority in China, and infectedover 31,400 people across 25 countries, according to the latest numbers reported on Friday by CNN.
Quarantines,done to contain the outbreak, have had an impact on global supply chainsincluding mined commodities. Earlier this week, China’s copper buyers asked Chilean miners to delayshipments due to port shutdowns. Oceanfreight carriers are refusing to dock in China, same as airlines have canceledflights. Some mining companies have had trouble delivering supplies due totransportation blockages and delays.
On Thursdaycopper got an unexpected pop due to concerns about a potential shortage ofrefined metals arising from breaks in supply chains. Three-month copper on theLondon Metal Exchange hit $5,813 a tonne - the highest futures price since Jan.27.
However thevirus’s overall effect on copper and other aspects of world trade has beennegative. In two weeks spot copper dropped from $6,300 a tonne to around$5,500/t. A number of multi-nationals with operations in China includingHyundai, Tesla, Ford, Nissan, Airbus, Adidas and Foxconn had said they are being affected by disruptions. Fiat said it would have to shut one of its Europeanplants within weeks due to a shortage of components from China.
As for whereChina stands on fulfilling its obligations under the Phase 1 trade deal, thisweek China halved tariffs on $75 billion worth of US imports, reciprocating the US decision to reduce by 50% tariffs on$120 billion worth of Chinese goods.
While that mayseem like a victory for trade liberalization, remember that most of the levies on$360 billion of Chinese imports that the Trump administration enacted in 2018are still in place, as are $35 billion of countervailing duties on US imports.Moreover, China’s pledge to buy an additional $200 billion of American goodsover the next two years, including farm products, has not yet been fulfilled.Some trade experts think it’s an unrealistic target given the problems the coronavirus is causing.
In sum, thetrade truce still leaves a lot of work to be done before we can say that it’sbehind us, and commodities can resume trading on their fundamentals.
Speaking ofwhich, we believe that once the trade war is resolved and (hopefully) thecoronavirus outbreak is contained (we are under no illusions, it will probablyget worse before it gets better), copper’s bullish fundamentals will be thecream that rises to the top of the base metals complex.
Supply
Over the nexttwo years, copper supply is expected to be weak in relation to all the strongdemand factors we outlined above. In short, the world needs more copper.
The basemetal is heading for a supply shortage by the early 2020s; in fact the coppermarket is already showing signs of tightening - something we at AOTH have covered extensively.
Some of thelargest copper mines are seeing their reserves dwindle and are having todramatically slow production due to major, capital-intensive projects to moveoperations from open pit to underground.
Grasberg in Indonesia,the world’s second largest copper mine, is emblematic of the problems copperminers are facing. The mine began as a large open-cast mine but after decades ofextracting the easy-to-reach ore, all the high-grade is gone and futureproduction is expected to come from a deep cave deposit known as the Deep MillLevel Zone. Along with underground mining costing significantly more per tonne,the mine’s owners are also facing potential blow-back from environmental groupsand government regulators for using hydraulic fracturing (fracking). According to CME Group,seismic activity has been reported at the mine.
Curiously,all of Grasberg’s issues haven’t dampened the enthusiasm of Barrick Gold CEOMark Bristow, who has gone on record saying that he sees Grasberg as apotential buy-out target for Barrick. “People say, ‘Are you interested in Grasberg?’ I say, ‘I have tobe; it’s a Tier 1 asset,’” Bristow said this week. I would question whetherthat’s still true, but I was more interested in what Bristow said next - thathe believes copper will be “the most-strategic metal on this planet” in adecade, referring to rising copper demand from the electric vehicleindustry.
Back tosupply, the current copper pipeline is the lowest it’s been in a century, andnot improving. In 2018, the director of commodities research at BMO CapitalMarkets, Colin Hamilton, said that after the delivery of first copper fromCobre Panama, a new copper mine, BMO doesn’t see the next batch of+200,000-tonnes projects until 2022-23 - “when the likes of Kamoa, Oyu TolgoiPhase 2, and QB2 are likely to offer meaningful supply growth.”
The biggestproblem? Existing copper mines just aren’t able to crank out as much productionthat they must, to ensure all the demand bases are covered.
As we wrote in The coming copper crunch, by 2035, without major new mines up and running toreplace the ore that is being depleted from existing copper mines, we arelooking at a 15-million-tonne supply deficit by 2035.
We can see ithappening already. According to the International Copper Study Group (ICSG), reporting last October,world copper output gained 2.5% in 2018 but in 2019 production was expected tofall half a percentage point:
“This year production has been significantlyconstrained by unforeseen disruptions in Africa and an anticipated sharpdecline in output in Indonesia as the transition of the country’s major two minesto different ore zones has resulted in temporarily reduced outputlevels.
The Group’s forecast for African mine and refined production issignificantly lower than its April forecast as a consequence of recentannouncements regarding suspensions at SX-EW mines, reductions in plannedproduction and temporary smelter shutdowns.
In addition, production growth in some major producing countriesincluding Chile, the United States and Peru has been limited by declining oregrades and other disruptions.
Increased production from new mine projects including Cobre dePanama in Panama, the Toquepala expansion in Peru as well as rises resultingfrom a recovery from constrained output in 2018 will only partially offset theaforementioned declines. "
Here’s aninteresting statistic:
New supply isconcentrated in just five mines - Chile’s Escondida, Spence and QuebradaBlanca, CobrePanama, and Kamoto in the DRC. And while these mines are expected to account for 80% of base-caseoutput increases between 2018 and 2022, their profitability depends on thecopper price staying above $5,000 a tonne, according to analysts at Bank of AmericaMerrill Lynch.
That meansexploration for new copper deposits that are large and high-grade enough to beeconomically brought into production is of primary importance to the miningindustry. Especially considering that the demand side of the equation, despitethe current lull in China, is only going to get stronger.
Problem is,miners are having to go further afield and dig deeper to find copper at thegrades needed to economically produce copper products for end users. Thisusually means riskier jurisdictions that are often ruled by shaky governmentswith an itchy trigger finger on the resource nationalism button. Combine that with production problems and you have the makings of asupply shortage.
Consider thesituation in Chile, the world’s largest copper-producing country.
Codelco’s Chuquicamata mine is expected to see a 40% fall in production over the next two years. A $5 billion expansion, moving from open pit tounderground, will take five years to reach full output of 300,000 tonnes perannum. Production will fall from an expected 459,000 tonnes in 2019 to 182,000tin 2021.
Exports fromBHP’s Escondida, the world’s biggest copper mine, were expected to drop by 85%last year due to operations moving from open-pit to underground. That’s adramatic fall from 1.8 million tonnes in 2018 to just 200,000 in 2019. TheChilean mega-mine is expected to take until 2022 to re-gain full production.
These cuts aresignificant to the global copper market because Chile supplies 30% of theworld’s red metal. Adding insult to injury, for producers, copper grades havedeclined about 25% in Chile over the last decade, bringing less ore tomarket.
Recentcountry-wide protests over transit prices and perceived inequality havedisrupted mining supply chains. The social unrest, alongwith a newly invigorated resource nationalism, has spooked would-be foreigninvestors in a country that only a few years ago was touted as an economictiger.
Chile also has problems with water.The country’s underground reservoirs need to be recharged by rainfall and snowmelt from the Andes, but a study found more water was leaving the salars (saltflats) than returning, prompting water restrictions affecting both lithium andcopper mines in the extremely arid Salar de Atacama, in northern Chile. In 2019 Chile’swater authority said it would double the number of areas off limitsto mining, from 30 to at least 70.
Escondida willstop drawing fresh water from the salt flat. Instead, the huge mine will bringdesalinated water from the coast, where in 2018 BHP spent $3.4 billion on adesalination plant. Two pipelines transport water a steep 3,200m above sealevel. Desalinated water will also supply BHP’s Spence mine, run through a150-km pipeline, starting this year.
Antofagasta’s Zaldivar mine is nearing its mine life at 2029, and may be forced to close earlier ifits water permits to draw water from the salar are not renewed.
A 2019 reportby Moody’s Investors Service said that some of the worst droughts in half acentury have led to tougher environmentalregulations that are hiking miners’ costs and risks. Among thecountries with mines exposed to decreasing water availability are Peru, Chile,Australia, South Africa and Mongolia.
As Chile’sreliability is called into question amid weaker output, social divisions andwater restrictions, mining companies are looking to Africa as an alternative.The continent’s two top producers, Zambia and the DRC, hold a combined 38million tonnes of copper reserves, more than the 58Mt in the UnitedStates.
However a newround of resourcenationalism is occurring in Africa.
In 2018 theDemocratic Republic of Congo (DRC) raised taxes and royalties on copper andcobalt - of which the DRC is the top producer - amid fierce opposition fromminers.
The country’snew mining code “imposed onerous fiscal terms on existing operators and allowsheightened levels of government interventionism in the sector,” according toa 2019 report by Verisk Maplecroft that includes the DRC among countries rated “extreme risk”for resource nationalism.
The World Bankranked the DRC 183th out of 190 countries in its 2016 Ease of Doing BusinessIndex, cited limited infrastructure, a poorly trained workforce and a deficientlegal system.
Over inZambia, Africa’s second largest copper producer, an economic crisis is forcing the country to consider seizing copper mines.
The Zambiangovernment wants to liquidate Vedanta Resources’ Konkola Copper Mines (KCM) which it accuses of breaching its operating license andpolluting the lands of nearly 2,000 villagers. For its part, Vedanta claims itis owed nearly $180 million in value-added tax refunds. Last July SouthAfrica’s High Court ordered the government to halt the sale of KCM until afinal decision is made through arbitration.
Like SouthAfrica which often experiences power disruptions due to problems with itsstate-owned utility, Eskom (the company implemented “load shedding in December which closed mines), Zambia also must deal with un unstable electricity grid.An industry group flagged the expiry of a supply deal on March 31 as thebiggest risk the country’s copper miners face this year. Mines consume aroundhalf of Zambia’s electricity and contribute about 70% of the country’s exportearnings, states BNN Bloomberg.
Artisanalmining is another big problem in many part of Africa, where hard-scrabbleminers dig for minerals in often squalid and dangerous working conditions. AtGlencore’s Kamoto mine - among the five mines new copper supply will come from- the DRC’s armed forces were called in last year after a landslide killed 43people. Glencore estimates around 2,000 unauthorized people enter the open-pitmine on a daily basis.
Conclusion
Copper is anessential metal needed for the functioning of a modern economy and for the newclean, green economy of the future that includes electric cars, trucks andbuses, smart grids, 5G, and to address the $94 trillion global infrastructuredeficit in any meaningful way.
The current supplyis only just meeting the demand, but a deficit is coming and we’ve already seenevidence of it in declining mine supply last year. In fact we might befortunate that copper demand has come off the boil recently, owing to thelingering US-China trade war and supply chain disruptions caused by thecoronavirus.
The bottomline is, we need more copper. Where are we going to find it? Existing mines arerunning out of reserves and coming to the end of their useful lives. The miningdownturn of 2012-16 meant little capital was dedicated to exploring for newcopper deposits, forcing companies to look farther afield for the redmetal.
The currentcopper pipeline is the lowest it’s been in a century. The five new mines thatwill bring on new supply are concentrated in Chile and the DRC. A wave ofpopular discontent has washed over Chile, based on yawning inequality, and thecountry has major problems with expanding production due to water scarcity. TheDRC is a place most mining companies want to stay away from, for all theabove-mentioned reasons.
We’ve seenmany instances of companies losing assets that were lawfully theirs. Severalcountries come to mind as places where shareholders could, without warning,receive news that their operations have been taken over by the government orits friends, or where permits get delayed or canceled outright.
To be fair,first-world countries aren’t immune to resource nationalism. Examples includethe UK government introducing higher resource taxes in the North Sea, Australiaincreasing mining royalties in Queensland, along with its controversialMinerals Resource Rent Tax (MMRT), and the Canadian government’s recent attemptto stifle resource development through Bill C-69.
Right now thecopper market is suffering a little due to the coronavirus and trade wars butwe expect these to be temporary phenomena. All it means is a delay on theinevitable copper surge that is coming - when trade impediments are solved andthe coronavirus is contained, hopefully eradicated, expect copper prices toburst higher like releasing a coiled spring.
By Richard (Rick) Mills
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Richard is host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 400 websites, including: Wall Street Journal, Market Oracle,USAToday, National Post, Stockhouse, Lewrockwell, Pinnacledigest, Uranium Miner, Beforeitsnews, SeekingAlpha, MontrealGazette, Casey Research, 24hgold, Vancouver Sun, CBSnews, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, Financial Sense, Goldseek, Dallasnews, Vantagewire, Resourceclips and the Association of Mining Analysts.
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