Copper, the Most Critical Metal / Commodities / Copper
In 2018, before the trade war betweenthe US and China put the boots to copper demand, and covid-19 mine closures/abandoned expansion plans crimped supply, we made a bold prediction: thatcopper supply is NOT going to be able to keep up with demand in the long-term.Here’s what we wrote, in Thecoming copper crunch:
Even with expansions at existingmines and the ramp-up of the relatively few new copper mines like Cobre Panama,Radomiro Tomic and Toquepalain, it will not be enough to meet the onslaught ofdemand that is coming from China as it continues to modernize and urbanize, andelectric vehicles, which use three times as much copper as regular ones. In2016 Chinese automakers sold 28 million cars. If China follows through on itspromise to go 100% electric, that would mean 2,380,000,000 kilograms of copper.At the current production rate of 20 million tonnes a year, that’s 119 yearsworth of copper! Just to produce enough copper for electric cars in China.
Do we expect 100% EV penetration?No. But the shift to electrification of our transportation system is real, it’snot going to go away or stop. Because it’s as real as the shift from wood tocoal to fossil fuels and now to lithium. That means massive new copper suppliesare needed just for Chinese EVs, whatever the EV penetration eventually turnsout to be. And remember there’s the rest of the world to supply for EVs,charging infrastructure, and all of copper’s other uses.
Bottom line? We gotta find morecopper.
‘Future-facing metals’
That sentiment is clearly shared by someof the world’s largest copper companies, who are doing everything they can toexpand existing mines and acquire prospective new deposits, as they seek toreplace their rapidly depleting copper reserves and resources.
In 2017 the Chilean government approveda $2.5 billion expansion of BHP’s Spence copper mine – the diversified miner’ssecond largest copper mine behind Escondida, the biggest copper operation inthe world.
That followed closely behindBHP’s 2016 decision to raise its annual exploration budget by 29%, allocatingnearly all of its $900 million budget to finding new copper and oil deposits –two commodities the world’s largest miner thinks it needs to bolster futuregrowth. Potential acquisition targetsinclude copper deposits in Peru, the US, Canada and South Australia.
In February of this year chiefexecutive Mike Henry said the company needs more “future-facing metals” such ascopper. Last year, BHP became the top shareholder in SolGold, an Australianminer developing the Cascabel copper-gold project in Ecuador.
Last week, BHP announced it isramping up work on the Spence mine expansion, to reach its production objectivein the first half of 2021 (the project has been delayed due to covid-19restrictions).
It’s interesting to note thatBHP is planning to “go green” at Spence, with a focus on running the operationentirely on renewable energy by 2022. The Melbourne, Australia-based companyalso aims to stop drawing water from aquifers in Chile by 2030 – a reference tothe problems mining companies are facing getting enough water in the bone-dryAtacama desert of northern Chile, the base of operations for several majorcopper and lithium mines.
The $2.5 billion expansioncontemplates a concentrator plant to increase production, and extend the lifeof the deposit by about 20 years. The new mine will also feature an $800million desalination plant located in the port city of Mejillones, about 60 kmnorth of Antofagasta, that treats and pumps seawater at 1,000 liters persecond.
BHP isn’t the only large mining firmtaking a serious look at copper. Barrick Gold is interested in diversifyinginto the red metal from the yellow. CEO Mark Bristow sees Indonesia’s Grasberg,the second largest copper mine in the world, as a potential buy-out target forBarrick. The company already owns the Porgera mine in Papua New Guinea, whichborders Indonesia to the east, with China’s Zijin Mining. In May, Bristow toldthe Financial Times hewas keen to expand in Asia, despite a recent dispute with the government of PNGover a renewal of Porgera's license, which led Barrick and Zijin to shut themine.
Meanwhile the CEO of Anglo American,another major diversified miner, indicated that South Africa would be a goodjurisdiction to explore for base metals. “Wewill explore base metals across South Africa… We are already in Zambia andother places, we want to do more in South Africa so we are looking foradjustments in legislation there,” Mark Cutifani said during the 2020 JoburgMining Indaba conference.
Copper, nickel, lead and zinc are amongthe base metals Anglo American is focusing its global discovery strategy ingreenfield and brownfield projects.
Running out of ore
Whyare major mining companies so intent on securing new supplies of copper? Quitesimply, they’re running out of ore.
As wehave reported, without new capital investments, Commodities Research Unit (CRU)predicts global copper mined production will drop from the current 20million tonnes to below 12Mt by 2034, leading to a supply shortfall of morethan 15Mt. Over 200 copper mines are expected to run out of ore before 2035,with not enough new mines in the pipeline to take their place.
Some of the largest copper mines areseeing their reserves dwindle; they are having to dramatically slow productiondue to major capital-intensive projects to move operations from open pit tounderground.
Grasberg in Indonesia, the world’ssecond largest copper mine, is emblematic of the problems copper miners arefacing. The mine began as a large open pit but after decades of extracting theeasy-to-reach ore is gone and future production is expected to come from a deepcave deposit known as the Deep Mill Level Zone. Copperconcentrate exports have plunged dramatically as operations shift from open pit to underground.
Major South American copper miners havealso been forced to cut production. State-owned Codelco has said it will scaleback an ambitious $40-billion plan to upgrade its mines over the next decade,after reporting a drop in earnings, a prolonged strike at its Chuquicamatamine, and lower metals prices. The world’s largest copper company also said itwill reduce spending through 2028 by 20%, or $8 billion.
Chuquicamata is expected to see a 40%fall in production by 2021. A $5 billionexpansion, moving from open pit to underground, will take five years to reachfull output of 300,000 tonnes per annum – this is not new production.
Shipments from BHP’s Escondida mine tooka hit in 2019 due to operations moving from open pit to underground. Thelargest copper mine on the planet is expected to take until 2022 to re-gainfull production, again not new production.
These cuts are significant to the globalcopper market because Chile is the world’s biggest copper-producing nation —supplying 30% of the world’s red metal. Adding insult to injury, for producers,copper grades have declined about 25% in Chile over the last decade, bringingless ore to market.
Country-wide protests over transitprices and perceived inequality have disrupted mining supply chains. The socialunrest, along with a newly invigoratedresource nationalism, has spooked would-be foreign investors in a country thatonly a few years ago was touted as an economic tiger.
Chile also has problems with water. Thecountry’s underground reservoirs need to be recharged by rainfall and snow meltfrom 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 doublethe number of areas off limits to mining, from 30 to at least 70.
Escondida will stop drawing fresh waterfrom the salt flat. Instead, the huge mine will bring desalinated water fromthe coast, where in 2018 BHP spent $3.4 billion on a desalination plant. Twopipelines transport water a steep 3,200m above sea level.
Antofagasta’s Zaldivar mine is nearingits mine life at 2029, and may be forced to close earlier if its water permitsto draw water from the salar are not renewed.
A 2019 report by Moody’s InvestorsService said that some of the worst droughts in half a century have led totougher environmentalregulations that are hikingminers’ costs and risks. Among the countries with mines exposed to decreasingwater availability are Peru, Chile, Australia, South Africa and Mongolia.
On top of all this, there is the ongoingthreat of strikes at South American copper mines which every year strip outsome percentage of output. In a recent article, Bloombergreports how a confluence of factors,including copper prices at a seven-year high, productivity gains (Chile isproducing at similar levels to last year with fewer workers) and weak localcurrencies, are swelling industry margins, emboldening unions to down tools andask for more pay/ benefits. Look for labor disruptions next year, when 31contracts are due to expire in Chile, including at BHP's Escondida, hit by a44-day strike in 2017.
What about new copper mines? Surelymineral exploration companies are identifying new ore bodies, cueing up thenext generation of copper producers?
Well, they are trying. Problem is, theyare having to go further afield and dig deeper to find copper at the grades neededto economically produce copper products for end users. This usually meansriskier jurisdictions that are often ruled by shaky governments with an itchytrigger finger on the resourcenationalism button. Combine thatwith production problems and you have the makings of a supply shortage.
In fact, new supply is concentrated injust five mines - Chile’s Escondida, Spence and Quebrada Blanca, Cobre Panamaand the Kamoa-Kakula project in the DRC. And while these mines are expected toaccount for 80% of base-case output increases until 2022-23, theirprofitability depends on the copper price staying above $5,000 a tonne, accordingto analysts at Bank of America Merrill Lynch.
The current copper pipeline is thelowest it’s been in a century, and not improving. In 2018 Colin Hamilton, thedirector of commodities research at BMO Capital Markets, said that after thedelivery of first copper from Cobre Panama (285-310,000t per year), BMO doesn’tsee the next batch of +200,000-tonnes projects until 2022-23 — “when the likesof Kamoa (501,000t per year), Oyu Tolgoi Phase 2, and QB2 (316,000t per year)are likely to offer meaningful supply growth.”
Electrification 2.0
Copper’s widespread use in constructionwiring & piping, and electrical transmission lines, make it a key metal forcivil infrastructure renewal.
The continued move towards electricvehicles is a huge copper driver. In EVs, copper is a major component used inthe electric motor, batteries, inverters, wiring and in charging stations. Anaverage electric vehicle contains about 4X as much copper as regular vehicles.Electrification includes not only cars, but trucks, trains, delivery vans,construction equipment and two-wheeled vehicles like e-bikes and scooters.
The latest use for copper is inrenewable energy, particularly in photovoltaic cells used for solar power, andwind turbines. The base metal is also a key component of the global 5Gbuildout. Even though 5G is wireless, its deployment involves a lot more fiberand copper cable to connect equipment.
The big question is, will there beenough copper for future electrification needs, globally? And remember, inaddition to electrification, copper will still be required for all the standarduses, including copper wiring used in construction and telecommunications,copper piping, and copper needed for the core components of airplanes, trains,cars, trucks and boats.
The short answer is no, not without amassive acceleration of copper production worldwide.
Arecent research report from Jefferies Research LLC concluded: “The coppermarket is heading into a multiyear period of deficits and high demand fromdeployment of renewable energy and electric vehicles. Secular demand driver incopper is electric passenger vehicles as the average EV is about four times ascopper intensive as the average ICE automobile. Renewable power systems are atleast five times more copper intensive than conventional power.”
President-elect Joe Biden plans a majorshift away from fossil fuels to wind and solar power, and from gas/ dieselvehicles to EVs. In what would be a significant scale-up of President Obama’s2009 plan to electrify the US transportation system, a kind of “electrification2.0”, Biden aims to spend up to $1.7 trillion over 10 years on boostingrenewable power and speeding introduction of electric vehicles.
Dubbed “Clean Energy Revolution”, theplan calls for installation of 500,000 electric vehicle charging stations by2030, and would provide $400 billion for R&D in clean technology.
One of the largest manufacturers ofpublic charging stations, ChargePoint, is targetinga 50-fold increase in its global network of loading spots by the mid-2020s. The group in which German companies BMW,Daimler and Siemens hold stakes, aims to operate 2.5 million charging points by2025, from 53,000 in 2018. A Level 2 charging station requires 7 kg of copper,a direct current fast charger (DCFC) or Level 3 station uses 25 kg.
BloombergNEF forecasts by 2040 therewill be a need for 12 million charging points, each requiring about 10 kg ofcopper. The number of EV charging stations recentlypassed the one million mark.
Biden has also promised a $1.3 trillioninfrastructure improvement plan, including: a $50 billion investment in repairsto roads and bridges; $10 billion for transit construction in poor areas of thecountry; a doubling of BUILD and INFRA grants, and more funding for the US ArmyCorps of Engineers.
The plan includes investments inhigh-speed rail, public transit, bicycling, school construction, expansion ofrural broadband, and replacement of pipes and other water infrastructure — allof which will require millions more tonnes of copper, along with otherinfrastructure metals such as nickel, zinc and aluminum.
Is this going to happen for the US? Wellif it is, it isn’t going to come cheap, as existing metal sources run dry. Across the Atlantic, theUK government has set a target of replacing all of its 31.5 million cars withelectrics by 2050. A team of scientists led by the Natural History Museum’shead of earth sciences, Professor Richard Herrington, took the government totask and calculated how much raw materials that number of EVs wouldrequire.
Theresearchers found that to build 31.5 million EVs would take a jaw-dropping207,900 tonnes of cobalt, 264,600 tonnes of lithium carbonate, at least 7,200tonnes of neodymium and dysprosium, and 2,362,500 tonnes of copper — about 10%of global production. Just mining the amount of raw materials required toreplace 2 billion cars globally would require four times the United Kingdom’stotal annual electrical output.
Prof.Herrington told AutoExpress that, while there isurgency in cutting carbon dioxide emissions, “society needs to understand thatthere is a raw material cost of going green”.
US and UK copper needs, of course, haveto be put in context with global demand for the essential base metal.
Total copper mine production worldwidefrom 2006 to 2019 (in 1,000 metric tons)
According toBloombergNEF, there are currentlyabout 7 million electric vehicles in the world today. By 2040, they estimatearound 30% of the world’s passenger cars will be electric. To me that’s aconservative and reasonable number. It means 500 million EVs will be on theroad in 20 years, out of a total vehicle fleet of 1.6 billion. If each EVcontains 85 kg of copper, that is 42,500,000,000 kg, or 42,500,000 tonnes ofcopper, roughly twice the current volume of copper produced by all of theworld’s copper mines.
Just so we’re clear — in 20 years,BloombergNEF says copper miners need to double the amount of global copperproduction (20Mt), just to meet the demand for a 30% penetration rate ofelectric vehicles. That means an extra million tonnes a year, over and abovewhat we mine now, every year for the next 20 years! The world’s copperminers need to discover the equivalent of two Kamoas, at 500,000t, each andevery year, while keeping current production at 20Mt.
Remember we still need to cover all thecopper demanded by electrical, construction, power generation, chargingstations, renewable energy, 5G, high-speed rail, etc., plus infrastructuremaintenance/ buildout of new infrastructure.
That might be another 5-7Mt. So not only is there a20Mt increase in copper usage required for a 30% EV penetration, but another(we estimate) 5-7Mt increase to meet demand for all of copper's otherapplications. To keep up, the industry will need to find an additional two tothree Kamoas a year, each producing 500,000t, for the next 20 years! Remember - Over 200 copper mines are expected to run out of ore before 2035, with notenough new mines in the pipeline to take their place. It’s going to be hardenough to keep up the current 20mt per year let alone add so much moreproduction.
Where is this new, and replacement,supply going to come from? When copper becomes so rare it hits $10,000 a tonne,what's going to happen to 30% EV penetration? High-speed rail? 5G? We suggestthat without new copper deposits, these well-intentioned plans are in jeopardy.
Did we mention China’s Belt and RoadInitiative (BRI), consisting of a vast network of railways, pipelines, highwaysand ports that would extend west through the mountainous former Sovietrepublics and south to Pakistan, India and southeast Asia?
Researchby the International Copper Association found BRI is likely to increase demand for copper in over 60 Eurasian countriesto 6.5 million tonnes by 2027, a 22% increase from 2017 levels.
Another reportby Roskill forecasts total copper consumption will exceed 43 million tonnesby 2035, driven by population and GDP growth, urbanization and electricitydemand. Remember total world mine production in 2019 was only 20Mt. In manycountries it takes 20 years to go from discovery through permitting to mining.
Copper goes critical
But there’s a weird thing happening. Themessage of a looming copper shortage that could bring the global electrificationshift to a screeching halt, and/or make copper so dear that only the rich canafford to buy finished products made from it, like EVs, isn't getting throughto the mining audience, because copper is not considered a critical mineral.
That term is reserved for minerals likelithium, cobalt, graphite, rare earths etc., which despite theirpresumed rarity, are actually fairly common. What makes them critical, is thefact that North America (and Europe) have virtually no domestic supply; withoutmines and a pipeline of deposits under development, and the smelters andknow-how to process them, we are hopelessly reliant on foreign countries. Oursupply chains are vulnerable and can be exploited at will by the countries thatdominate production, through policies like domestic ore beneficiation, exportrestrictions, tariffs and quotas.
For years North America didn’t bother toexplore for these minerals and build mines. Globalization brought with it thementality that all countries are free traders, and friends. Dirty mining andprocessing? NIMBY. Let China do it, let the DRC do it, let whoever do it. Thishas to change, if the US and Canada are to regain control of their criticalminerals stockpiles.
For example, according to the USGeological Survey, of the 7 million tonnes of cobalt reserves availableglobally, nearly half — 3.6Mt — are in the Democratic Republic of the Congo(DRC). The DRC is the world's leading cobalt supplier by far, in 2019 producing100,000 tonnes of the EV battery ingredient. China locked up supply from theDRC with infrastructure for off-take, brings it home and refines it to sell tothe world. But there is a lot of cobalt found elsewhere. Australia has 310,000JORC-compliant tons of cobalt but only mined 5,100t last year. Canada has areserve of 300,000t but only produced 3,000t. Of the 55,000 tonnes of cobaltreserves identified in the US, only 0.01% was mined in 2019, or 550t.
NorthAmerica is well endowed with huge, quality rare earth deposits, enough tosupply us with decades and decades of production. Examples include CommerceResources' (TSXV:CCE) Ashram rare earths deposit in Quebec, and Ucore RareMetals' (TSXV:UCU) Bokan Mountain REE project in Alaska. Graphite One(TSX.V:GPH) has an excellent graphite project in Alaska.
Whatwe lack is processing and larger-scale manufacturing, ie. nearly all of theworld's mined rare earth oxides are processed in China; only very recently hasREE processing started happening outside that country:
Mountain Pass inCalifornia expects to start processing REEs by the end of 2020.Lynas signed a jointventure agreement with Blue Line Corp. to build a rare earths processing plantin Texas.Saskatchewan is setting upa processing facility.(Europeis also starting to get smart and deal with its lack of critical minerals minedand processed on the continent. The EU recently launched the European RawMaterials Alliance, a partnership of over 300 companies, business associationsand governments, that will focus on breaking Europe’s dependence on importsfrom China and other resource-rich countries. Analysts estimate the group of 29nations will need about 60 times more lithium and 15 times more cobalt for EVbatteries and energy storage by 2050.)
Graphiteis another mineral that is mined and processed under a near monopoly by Chinabut exists in large quantities elsewhere. According to the USGS, China in 2019produced nearly three-quarters of the world's graphite — 700,000 tonnes of the1.1Mt total. The country indeed has a large proportion of global graphitereserves, 73Mt out of 300Mt. But China doesn't host the majority of the world'sgraphite. In fact Turkey has more, 90Mt, yet last year only mined 2,000t. 25million tonnes are held by Mozambique but the African country only produced100,000t. Brazil has nearly as much graphite as China, 72Mt, but in 2019,produced just 96,000 tonnes, about 13% of China's mine production. Othercountries with significant graphite reserves, are India (8Mt), Madagascar(1.6Mt), Mexico (3.Mt), Tanzania (18Mt) and Vietnam (7.6Mt).
Certainlythe above-mentioned metals, and the rest of the 23 mineral commoditiesidentifed by the US Department of the Interior, are critical, in that they areall important to the country's economic and military security. You cannot, forexample, make a lithium-ion battery without lithium, graphite and cobalt. Butmost of these metals are labeled critical because so much quantity comes from China,Russia or the DRC. Too much supply is coming from one country and China iswhere most of the refining is done. When we start mining and processing here inthe West, or work with our mining country allies, some degree of ‘criticality’will be removed. Why can't we start mining all these minerals here? We havethese materials in North America, South America, Australia and to a lesserextent, Europe. The next step is unfettered access and the creation of strongsupply chains to get these metals from mine to market.
Copper,however, is different. Arguably, the red metal is the most critical of allcritical metals, because of its necessity in electrification, and the fact thatthere is an actual shortage of copper coming.
There is no shift from fossil fuels to green energy without the red metal,which has no substitutes for its uses in EVs (electric motors andwiring, batteries, inverters, charging stations) wind and solar energy, and5G.
Even with a 30% penetration of EVs, arelatively conservative estimate, we need to find another 20 million tonnes per year over 20years.
On Tuesday, Nov. 24 copper prices hit afresh 2020 pinnacle of $3.52 per pound on the Comex in New York. The redmetal's best performance in seven years was on the strength of Chinesemanufacturing and construction expanding at its fastest in a decade. Thecountry's manufacturing PMI for November, seen as a leading indicator of copperusage, rose to 52.1 while the Caixin manufacturing PMI, which includes bothlarge and small firms, jumped to a 10-year high of 54.9. The construction indexleapt from 59.8 in October to 60.5.
Ironore has also been on a tear of late. The steelmaking ingredient hit $132.13 atonne last Tuesday, a six-year high.
The numbers are so good, some marketobservers are pulling up charts from the “mining supercycle”. Reutersquotes Goldman Sachs predicting a returnto the “structural bull market” of the 2000s, when most mined commodity pricesgot a lift due to demand (especially in China and India) outstripping availablesupplies. In a report the investment bank states:
“Covid is already ushering in a new era of policies aimed at social needinstead of financial stability [which] will likely create cyclically stronger,more commodity-intensive economic growth, that should create the elusivecyclical upswing in demand.”
Metaltraders say copper is looking like it did at the start of the ’03 supercyclestart, having surged this year on a wave of bullish factors including aweakened dollar, optimism over covid vaccines, a move toward low-carbon powersources, and virus-related supply disruptions in the key copper-producingcountries of Chile, Peru and Mexico. Prices are up more than 70% from amid-March low, and Morgan Stanley predicts a substantial increase next year, toan average $7,716 a ton ($3.85/lb) in the fourth quarter.
Howeverunlike the previous supercycle, which depended on China, Goldman says the nextstructural bull market will be driven by spending on green energy, for whichcopper is a key ingredient:
“Spending on green infrastructure could be as significant as the BRIC(Brazil-Russia-India-China) investment boom of that decade while theredistributive push in developed markets “is likely to lead to a large boost toconsumer spending, comparable to the lending-fuelled consumption increase inthe 2000s”.
Thepath of least resistance to the price of copper is, imo, higher.
By Richard (Rick) Mills
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