A major contraction of copper is ahead for the global economy

(Bloomberg) — The price of copper — used in everything from computer chips and toasters to power systems and air conditioners — has fallen by nearly a third since March. Investors are selling on fears that a global recession will curb demand for the metal synonymous with growth and expansion.

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You wouldn’t know it by looking at the market today, but some of the biggest miners and metals traders are warning that in just a few years there will be massive shortages of the world’s most critical metal – one that is itself holding back global growth. , fuel inflation by raising production costs and throw out global climate goals. The recent downturn and resulting underinvestment only threatens to make it worse.

“We’re going to look back to 2022 and think, ‘What now,'” said John LaForge, head of real asset strategy at Wells Fargo. “The market is simply reflecting immediate concerns. But if you really think about the future, you can see that the world is clearly changing. It will be electrified and will need a lot of copper.”

Stocks tracked by trading exchanges are near historic lows. And the latest price volatility means that new mine output — already expected to start declining in 2024 — could become even tighter in the near term. Just days ago, mining giant Newmont Corp. shelved plans for a $2 billion gold and copper project in Peru. Freeport-McMoRan Inc., the world’s largest publicly traded copper supplier, warned that prices are now “insufficient” to support new investment.

Commodity experts have been warning of a potential copper crisis for months, if not years. And the latest market decline could exacerbate future supply problems — offering a false sense of security, choking cash flow and chilling investment. It takes at least 10 years to develop a new mine and bring it into operation, meaning the decisions producers make today will help determine supply for at least a decade.

“A significant investment in copper really requires a good price, or at least a good perceived long-term price of copper,” Rio Tinto Group Chief Executive Jakob Stausholm said in an interview this week in New York.

Why is copper important?

Copper is essential to modern life. There’s about 65 pounds (30 kilograms) in the average car, and more than 400 pounds going into a single-family home.

Metal, considered the benchmark for conducting electricity, is also key to a greener world. While much of the attention has focused on lithium – a key component in today’s batteries – the energy transition will be driven by a variety of raw materials, including nickel, cobalt and steel. As for copper, millions of feet of copper cables will be critical to strengthening the world’s electrical grids, and tons upon tons will be needed to build wind and solar farms. Electric vehicles use more than twice as much copper as gasoline-powered cars, according to the Copper Alliance.

How big will the shortfall become?

As the world goes electric, net-zero emissions targets will double demand for the metal to 50 million metric tons a year by 2035, according to an industry-funded study by S&P Global. While this prediction is largely hypothetical, given that copper cannot be consumed if it is not available, other analyzes also point to the potential for a spike. BloombergNEF estimates that demand will increase by more than 50% from 2022 to 2040.

Meanwhile, mine supply growth will peak around 2024, with a shortage of new projects in development and as existing sources dry up. This creates a scenario where the world could see a historic deficit of as much as 10 million tonnes in 2035, according to research by S&P Global. Goldman Sachs Group Inc. estimates that miners need to spend about $150 billion over the next decade to address the 8 million tonne shortfall, according to a report released this month. BloombergNEF predicts that by 2040 the mining shortfall could reach 14 million tonnes, which will need to be filled through metal recycling.

To put into perspective how massive this shortfall would be, consider that in 2021 the global shortfall stands at 441,000 tonnes, which equates to less than 2% of demand for the refined metal, according to the International Copper Research Group . That was enough to send prices up about 25% that year. The current worst-case projections from S&P Global show that the deficit in 2035 will be equivalent to about 20% of consumption.

What does this mean for prices?

“It’s going to get extreme,” said Mike Jones, who has spent more than three decades in the metals industry and is now CEO of Los Andes Copper, a mining exploration and development company.

Where are prices going?

Goldman Sachs predicts the benchmark price on the London Metal Exchange will almost double to an annual average of $15,000 a tonne in 2025. On Wednesday, copper settled at $7,690 a tonne on the LME.

“All signs for supply point to a pretty tough road ahead if producers don’t start building mines,” said Piotr Kulas, senior base metals analyst at CRU Group, a research firm.

Of course, all these mega-demand predictions are based on the idea that governments will continue to push for the net-zero consumption goals desperately needed to combat climate change. But the political landscape could change, and that would mean a very different scenario for the use of metals (and the planet).

There is also a common adage in commodity markets that can come into play: high prices are the cure for high prices. Although copper is down from March’s record high, it is still trading about 15% above its 10-year average. If prices continue to rise, it will eventually prompt clean energy industries to create ways to reduce metal consumption or even look for alternatives, according to Ken Hoffman, co-head of the EV battery materials research group at McKinsey & Co .

The supply of scrap can help fill gaps in mine production, especially when prices rise, which will “drive more recycled metals into the market,” said Sung Choi, an analyst at BloombergNEF. S&P Global points to the fact that as more copper is used in the energy transition, it will also open up more “recycling opportunities”, such as when electric cars are scrapped. Recycled output will account for about 22% of the total refined copper market by 2035, up from about 16% in 2021, S&P Global estimates.

The current global economic malaise also underlines why the chief economist of BHP Group, the world’s biggest miner, said just this month that copper has a “bumpy” road ahead due to demand concerns. Citigroup Inc. predicts a fall in copper in the coming months due to a recession, especially caused by Europe. The bank has a forecast of $6,600 in the first quarter of 2023.

And the outlook for demand from China, the world’s largest consumer of metals, will also be a key driver.

If China’s property sector shrinks significantly, “it’s structurally less demand for copper,” said Timna Tanners, an analyst at Wolfe Research. “To me, it’s just an important offset” to consumption projections based on net-zero goals, she said.

But even a recession would mean only a “slowdown” in demand and would not “significantly disrupt” consumption projections through 2040, according to an Aug. 31 BloombergNEF presentation. That’s because so much of future demand has been “legislated” through governments’ focus on environmental goals, making copper less dependent on the broader global economy than it once was, Wells Fargo’s LaForge said.

Also, there is little wiggle room on the supply side of the equation. The physical copper market is already so tight that despite futures prices falling, premiums paid for immediate delivery of the metal are moving upward.

What’s holding up supply?

Just look at what’s happening in Chile, the legendary mining nation that has long been the world’s largest supplier of the metal. Copper export earnings fall due to production problems.

In mature mines, ore quality deteriorates, meaning production either slips or more rock must be reworked to produce the same amount. Meanwhile, the pool of committed projects in the industry is running out. New deposits are becoming increasingly difficult and expensive to find and develop. In Peru and Chile, which together account for more than a third of global output, some mining investment has stalled, partly amid regulatory uncertainty as politicians seek a bigger share of the profits to address economic inequalities.

Rising inflation also raises production costs. That means the average incentive price, or the value needed to make mining attractive, is now about 30% higher than it was in 2018 at about $9,000 a tonne, according to Goldman Sachs.

Globally, supplies are already so tight that producers are scrambling to squeeze small bits out of the trash. In the U.S., companies are grappling with resolving blockades. While in the Congo, weak infrastructure limits the potential for growth of large deposits.

Read more: Largest US copper mine shut down over sacred land dispute

And then there’s this great controversy when it comes to copper: the metal is essential for a greener world, but digging it out of the ground can be a pretty dirty process. At a time when everyone from local communities to global supply chain managers are tightening their grip on environmental and social issues, getting approvals for new projects is becoming much more difficult.

The cyclical nature of commodity industries also means manufacturers face pressure to keep their balance sheets strong and reward investors rather than aggressively embark on growth.

“The incentive to use cash flows for capital returns rather than investment in new mines is a key factor leading to shortages of the raw materials the world needs to decarbonize,” analysts at Jefferies Group LLC said in a report this month.

Even if producers shift gears and suddenly start pouring money into new projects, long mine lead times mean the supply outlook is pretty much fixed for the next decade.

“The short-term situation contributes to the stronger outlook in the long term because it affects supply developments,” Richard Adkerson, Freeport-McMoRan’s chief executive, said in an interview. Meanwhile, “the world is becoming more electrified everywhere you look,” he said, inevitably bringing “a new era of demand.”

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