Pouring molten copper at a copper mill in Chile.

Copper’s continued rise seems to be without barriers right now, even after China ramped up efforts to cool the commodities surge that may be building fears of global inflation. Worries on the other side of the planet are also fueling concerns about the long-term supply outlook. 

Chile’s proposed tightening of regulations in the country and higher taxes on royalties and other profits may not come to pass, but until a resolution is made by vote, miners and traders will continue to haggle over the direction of copper. For now, the bias has been a solid upward trend that is showing no signs of abating. 

The world’s biggest copper-producing country (Chile) has just elected an assembly that had put the writing and signing of a new constitution mostly in control of the left-wing. With social and environmental concerns at the forefront of their political agenda, there isn’t much room for error as opponents of the new policies work to prevent them from being signed into law. 

Compromise Will Be Necessary

In the end, some regulations could be coming down the pipeline, with miners facing more rigid rules around environmentally-friendly operations and mineral rights. That regulation would ultimately pave the way for one of the heaviest taxes on the mining industry in the world. Royalties and profits from mining activities in the country could be taxed at higher rates than ever before, possibly leading some miners to shift focus to other regions. 

For some companies, risks are minimized. Canadian miner Teck Resources (NYSE:TECK) has a stability agreement in place with the country that will shield its massive Quebrada Blanca Phase 2 copper project from higher tx levels for 15 years, according to Chief Executive Don Lindsay. Many countries south of the equator have shifted tone on mining, with Peru’s socialist presidential candidate Pedro Castillo claiming he would raise taxes and royalties on Peru’s all-important mining sector and move to quickly renegotiate with large companies over their tax contracts. This is a big if, as he has not been elected, and opposition is strong. 

Lobby groups, politicians, mining companies, and their workers will look to maintain operations as they are, with job creation and economic growth a key pillar for the countries in which the mining industry operates. As one of the most significant sectors for many of these countries, the jobs they rely on and the tax income generated are essential to the nations and the politicians who run them. 

There’s No Stopping This Train, Even if it Slows

For now, China continues to maneuver to try to find ways to contain costs and keep prices low or at least stable. Citigroup analysts recently recommended buying the dips since Beijing could “easily run out of options” for tamping down price growth. Analyst Tracy Liao wrote in a note that, “We do not foresee such a U-turn any time soon given the strategic priority of these agendas.”

The coming decade is likely to see consistent growth for copper prices, regardless of intervention as the global economy pivots to an electrified format with EVs and batteries driving much of the transition. 

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice. The author is not an insider or shareholder of any of the companies mentioned above. 

Glencore (GLEN:LN), one of the world’s largest producers and marketers of copper, produced 1.26 million tonnes and sold 3.4 million tonnes through its marketing business in 2020. Their copper production is so large that the company is also a major producer of cobalt, a byproduct of copper. Most of their cobalt product comes from the Democratic Republic of Congo.

The Start of an Upward Trend

While 2020 was a good year for Glencore (GLEN: LN), 2021 began to set the trend for production increases. On Thursday, the company reported 301,200 tonnes produced in the first quarter of 2021, 3% higher YoY from Q1 2020. While the reopening of production and the lifts of restrictions for miners contributed to this bump, productivity improvements also lent a hand to the increase. 

“The group’s overall production was broadly in line with our expectations for the first quarter. Production in Q1 2021 reflects that many of our operations continue to maintain thorough Covid-safe working practices, as appropriate for each specific country and region. Full-year production guidance has been maintained for our key commodities,” according to CEO Ivan Glasenberg.

Big Influence

Glencore’s business is one of the most diversified, comprising more than 60 commodities. The company has operations at approximately 150 mining and metallurgical sites in more than 35 countries. Employing 135,000 employees and contractors, where Glencore goes, significant employment number improvement often follows, and the company holds so much sway in many commodities that it is often responsible for price changes as a direct result of supply and demand. 

Copper’s in-demand status continues to increase, and Glencore’s production increase is just a piece of what will be necessary over the coming years to meet the massive demand coming. As one of the largest producers and marketers of copper in the world, Glencore (GLEN: LN) will need to take a lead position in the market and help balance the supply issues facing the industry right now. 

 

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice. The author is not an insider or shareholder of any of the companies mentioned above. 

The Paris climate goals and the transition away from fossil fuels toward electrification are set to create an unprecedented surge in copper demand, according to Goldman Sachs’s new report on copper. The global investment bank is forecasting a long-term supply gap of 8.2 million tonnes of the metal by 2030, “twice the size of the gap that triggered the bull market in copper in the early 2000s.” This would be the “highest on record” and would set the tone for the 2020s making this period the strongest phase of volume growth in global copper demand in history. 

Copper’s Importance

The world isn’t just moving away from fossil fuels, but it is actively working on reducing and reversing some of the warming effects of greenhouse gases. The impact of climate change costs the global economy hundreds of billions of dollars. Investing in clean technologies is the antidote. The investment in technologies like carbon capture and storage technology, renewable energy, and electrification of everything from cars to manufacturing means that copper will have a critical role to play in this new economy. 

The centrality of the red metal makes it a critical component for strategic investments both from private businesses and governments. The countries willing to invest in the infrastructure and support for mining companies now will have profits coming in steadily over the next decade. Some have even called copper a national security issue due to its strategic value. 

A Shortage That Threatens National Security

The high value, current under-investment, and lack of tier one mines makes it a potentially destabilizing force as many countries classify certain metals as strategic. For context, one only needs to look at history. 

The wars of the past 50 years have been fought for several reasons, but one of the prime motivators for conflicts in the Middle East was oil. Winning the war meant rebuilding the infrastructure in the region and therefore gaining a foothold in the supply. This was highly valuable to foreign countries and the mining companies extracting these extremely strategic resources.

The countries with abundant copper deposits sitting within their borders may ultimately come to realize that the global demand and urgency of the commodity will drive its importance for the largest economies in the world. As the scramble continues and even accelerates as demand multiplies, those countries may find themselves standing between powerful corporate interests and the governments fighting to secure the supply required for their needs. A shortage of copper would mean a fierce fight for the material that is certain to play a significant role in the large and developed economies accelerating toward net-zero emissions right now. With most countries targeting 2050 for this goal, copper’s demand will likely grow fastest in the first half of the century and continue into the second. By the middle of the century, it will be necessary for a plethora of manufacturing, products, and energy supply and storage. 

Each of these functions could easily fit under the national security blanket, pushing countries to nationalize supply or even move aggressively, as happened during the Iraq wars.  The good news is that copper mining companies are exploring and developing those projects now and are setting themselves up to be right in the middle of this boom, taking advantage of a supercycle that will drive profits for decades. 

Goldman Puts Things Into Perspective

Goldman’s prediction that the copper price would reach $6.80 per pound by 2025 is a significantly bigger statement, demonstrating that the investment bank believes that copper will not need to wait until 2050 to see new peaks in demand spiking regularly. According to their recent report, prices will also spike regularly, breaking highs and setting new records within as little as four years from now. This past February, copper hit a multi-year high, foreshadowing a sliver of what is to come. 

Analysis

The authors of the report, Nicholas Snowdon, Daniel Sharp, and Jeffrey Curries estimate that demand from electrification “will grow nearly 600% to 5.4Mt (million tonnes) in our base case and 900% to 8.7Mt in the case of hyper adoption of green technologies” by 2030. In the conservative base case, copper miners would see a massive demand to be filled surge faster than current production and production plans can accommodate. In the case of “hyper adoption of green technologies,” the world is likely to see a problematic copper shortage that is certain to push the price higher and faster.

The authors continued: “Crucially, the copper market as it currently stands is not prepared for this demanding environment. The market is already tight as pandemic stimulus (particularly in China) has supported a resurgence in demand, set against stagnant supply conditions. Moreover, a decade of poor returns and ESG concerns have curtailed investment in future supply growth, bringing the market the closest it’s ever been to peak supply.”

Steep Trendlines

The report forecasts a copper price of US$15,000 per tonne by 2025, up from today’s price of around $9,000 per tonne today. To get a sense of the trend, the report included estimates of the average price by year: 

  1. 2021: US$9,675/t
  2. 2022: US$11,875/t
  3. 2023: US$12,000/t
  4. 2024: US$14,000/t

The culmination in 2025 at $15,000 would mean huge profits for miners as well as a need for new greenfield project approvals. 

Driving Prices

The demand driving the copper price stems from three main drivers of green copper (copper mined cleanly):

  • Electric vehicles (EVs)
  • Solar power 
  • Wind power

Goldman estimates a 2021 sales volume of 5.1 million EVs in 2021, with that number rising to 31.51 million in 2030. Just to meet that demand, current copper production might need to double or triple. Including charging units (of which Goldman estimate 30 million will be installed by 2030), accessories, batteries, and other power storage needs, copper demand seems to be almost incalculable. Conservative estimates make it seem like production is far behind, and the top end of the range requires unprecedented investment in the industry for new projects.

How is it Going?

Right now, the copper market is not prepared for this demand. The massive copper deposits to be found in the Andean Copper Belt, being discovered and explored by miners like Solaris Resources, EcuaCorriente, and SolGold are set to become some of the most valuable projects in a high-value copper region. 

Some analysts disagree with the borderline alarmist analysis in the report, with opinions often coming down on the side of caution where prices are concerned. According to TD Securities, “Commodity demand is being supported by a weakening dollar amid a consolidation in U.S. interest rates and fiery risk appetite. Demand continues to pick up, but as the world exits the pandemic and begins to ramp up production, “…metals supply risk is likely to subside from here, adding some pressure to industrial metals prices.” 

It seems that for now, there is no perfect consensus as to where the copper market might end up. While demand is guaranteed to increase, the scale of supply risks and production worries are still speculative and do not add up to a definitive answer on where the balance lies. There will no doubt be an imbalance as demand outstrips supply for the next decade, but analysts are still split on how big that gap might be. In either of Goldman’s scenarios, the situation seems quite dire, with the price ending up in the stratosphere. TD Securities seems to temper that outlook somewhat, without disputing the key point here that copper prices are set to rise no matter what. 

No matter which side of the spectrum you might fall, the next decade is sure to be a wild ride for everyone with a piece of this cake, and is guaranteed to bring a sugar high for decades to follow. 

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