- 75% of copper usage is for fabrication into products that generate, transfer, or utilise electrical energy.
- The most powerful investment case for copper is based on greater electrification of the world and the migration away from fossil fuels. This requires a massive buildout in the infrastructure for the creation, transmission, and storage of electrical energy, most elements of which utilise copper out of desirability or necessity.
- Over the next 20 years an increase in copper demand of 50% to 100% can reasonably be expected, and a ‘low-carbon energy future’ could see this demand multiply further by 2050.
- Existing mine production is estimated to drop from the current c. 20mt/year to <12mt/year by 2035, leading to a large and persistent structural supply shortage.
Theme initiated in Q3 2022, when the copper price was c. $3.5/lb.
Copper Price (Futures)
Copper is one of the so called “industrial metals”, and is mainly used to build electrical equipment such as wiring and motors. It conducts both heat and electricity very well, and can be drawn into wires. It also has uses in building construction, e.g., roofing, and industrial machinery in radiators and heat exchanges.
Over 75% of copper is consumed in some from in relation to electrical energy. Copper wiring (for conduction of electricity or heat) consumes c. 60% of supply, roofing and plumbing takes c. 20% (the estimated lifespan of copper roofing is 100 years, making it one of the most cost-effective roofing materials), and alloys (e.g., brass and bronze) consumes c. 5%.
In aggregate, copper is a >25 million metric ton (mt) annual demand market. Of this, c. 20mt is sourced from primary mining (although this dropped to c. 18mt in 2020), with c. 5mt from recycled sources.
On the supply side there are over 800 producing copper mines. However, supply is highly concentrated with c. 45% coming from 20 large (and old) mines, mostly in Peru and Chile.
Supply and demand have historically been relatively balanced, but this stability can break down rapidly when a few million tonnes is taken off the market and stored for investment.
There are three main sources of copper – two primary sources (mining), and scrap recycling. Of the two primary sources, the main is sulphide mining, which produces a ‘concentrate’ with low grades of c. ½%, subsequently needing to be enhanced to c. 30% before smelting. This supplies c. 16mt/year or more. As a noteworthy aside, most of this smelting occurs in ‘the East’ due mainly to environmental and political objections in ‘the West’.
The second primary source is electroplated cathode. Here, rock from copper oxide mines is crushed, bathed in sulfuric acid and used to electroplate copper into 99% pure copper sheets to ship to fabricators. This process yields c. 4mt/year or more.
Good copper ore deposits are geologically scarce, and options for future large-scale supply are typically restricted to:
1) High elevations (e.g., in The Andes in Chile).
2) Relatively high potential risk jurisdictions.
3) Established copper mining camps (some of the best choices being Arizona and Nevada in the US).
Copper mines are relatively complex, and it isn’t simple to shut them down temporarily. They typically flood quickly, which destroys electrical infrastructure, and ventilation capacity where underground. They are also very capital intensive and usually involve a substantial amount of debt which is a fixed cost that does not stop if production stops.
The key driver of demand is the reduction in global carbon emissions from combustion engines and the move towards electrification in general. A car with an Internal Combustion Engine (ICE) uses 40 to 50lb of copper, a hybrid vehicle around double this, and a battery vehicle around three to four times. Although long term most of this copper could be recycled, depending on the average life of EVs, this is unlikely to occur for at least 10 years. Some estimates indicate that 30% of new car sales by 2035 will be electric vehicles (EVs), each using c. 3-4 times more copper than internal combustion engine (ICE) cars.
Electricity produced by offshore wind farms requires around ten times more copper per megawatt than onshore, and one megawatt of solar photovoltaics use about 4 tonnes of copper. Historically (pre-2020) the electrification trend (electricity as a % of final energy usage) was c. 2% per decade. In the next 30 years this is expected to rise to 50% to final energy usage. Copper demand is also fairly inelastic to price movements, given the low impact of price changes on the final cost and the relatively low potential for substitution.
Minerals used in electric cars to conventional cars
Minerals used in clean energy compared to other power sources
Demand for copper is consequently expected to double from a relatively stable c.3% p.a. to a 6% CAGR. With a current market of c.25mt, this would imply a 2035 annual demand of closer to 40mt.
Copper is not a rare metal and it is highly unlikely that we will ‘run out’ of copper. There are c. 830mt of global reserves, and since 1950 there has typically been an average of c. 40 years of reserves. However, similarly to other mined commodities, it is becoming harder and more expensive to produce copper.
Copper ore grades are declining, which is impacting yields and the long-term viability of mining at current prices. A key issue for long-term supply is that the output, until relatively recently, used to be c. 1% copper concentrate, and previously c. 2% or above. With rapidly declining grades it therefore costs substantially more to double rock throughput to obtain the same copper yield. The ‘low hanging fruit’, the easier projects at higher grades, have mostly been exhausted. There are lots of known copper resources, but at grades <½% large companies are only going to be able to afford to convert these resources to reserves at materially higher copper prices.
It is estimated that c. $1.7tr of investment is needed to meet the estimated increase in annual demand copper. As a comparison between 2005 and 2019, mostly during the ‘China supercycle’, around $600bn of capital went into sourcing and producing the important electric metals copper, nickel, cobalt, lithium, and aluminium. Due to the long permitting and construction timescales, companies need to incubate known projects today for new supply to commence within 8 to 10 years. Whereas historically it has taken c. 20 years from discovery hole to feasibility study.
In the short-term copper is also susceptible to supply shocks. In terms of reserves in global warehouses, copper typically runs at less than 10 days of demand. This is in substantial contrast to oil where China has >1bn barrels in strategic reserve and the US c. 750ml barrels. For example, in October 2003 there was a tight market with low inventories when the second largest copper mine in the world at that time (Grasberg) suffered a pit collapse, which contributed to the doubling of copper prices. (This mine has subsequently had other collapses in 2006, 2013, and 2014).
In 2001-2002 copper was priced around an inflation-adjusted low of 70c/lb, yet rebounded to $2/lb by 2004-2005. Although both minors and fabricators were afraid of substitution this did not substantially happen and the price (also aided by Grasberg pit collapse) reached $4/lb. It has averaged c. $3/lb since 2005.
As a guide, BHP Billiton, the largest integrated minor in the world, requires c. 3.5$/lb copper price for c. 75% of its projects to be viable. Capex averages c. $2.5bn / 100kt of future metal yield, so copper prices of c. $4/lb generally do not provide enough margin of safety to justify the significant financing and capex spend, which at current grades, starts to become viable at $10k/t (or c. $4.5/lb) – the recent high. This provides a good long-term lower support price level.
Whilst historically the price of copper fluctuated mainly as a result of the economic/investment cycle, going forward we expect an increase in secular demand will structurally support the price of copper. In order to match this growing demand, the price of copper will need to increase materially to support new investments in production and mining at declining yields.
We recognise that, in the short term, copper prices are very sensitive to fluctuations in the economic cycles which could provide good opportunities to gain exposure to the theme.
Risks & Issues
The most likely bear case for copper in the short to medium term is a significant and prolonged economic slowdown. Traditionally, especially if accompanied by high market-set interest rates, such downturns have been bad for commodities like copper and their related mining stocks.
There is also a threat of substitution. The primary substitute for power transmission lines is aluminium. In some cases, aluminium is the more appropriate metal to use, primarily due to its lightness. This is seen mostly in high-voltage and medium-voltage power lines (due to its lightness), low-voltage and medium voltage cable, and die-cast rotors for induction motors.
There appears to be a price incentive for substitution between copper and aluminium at around 3.5 to 1, so this relative price is worth monitoring. In the case of communication and data cables there is the risk of substitution with wireless and fibre optics, and in motor windings substitution with permanent magnets or switched-reluctance motors is feasible. However, substitution is not likely to be as big a factor as some expect – for example, the transition from copper to plastic piping for domestic water supply is largely complete where suitable for new developments.
A greater degree of recycling could also dampen the growth in the price of copper. The best year for scrap recycling peaked at c. 25% of supply in 2012, a year or so after the last price peak of $4/lb. The sustainable average recycling rate appears to be around 20% or lower. However, copper has always been, and will likely always be, recycled, so recycling is not expected to materially increase supply. Additional recycling could add perhaps 1mt on a 25mt and growing market.
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