A Great Copper Squeeze Is Coming for the Global Economy

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

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You wouldn’t realize it by looking at today’s market, but some of the biggest miners and metal traders are warning that in just a few years there will be a massive gap for the world’s most critical metal – one that could itself be slowing down the global one growth, fuel inflation by raising manufacturing costs and throw global climate goals off track. The recent downturn and resulting underinvestment only threatens to make things worse.

“We’re going to look back at 2022 and be like, ‘Oops,'” said John LaForge, Wells Fargo’s head of real asset strategy. “The market only reflects the immediate concerns. But if you really think about the future, you can see that the world is changing significantly. It is electrified and a lot of copper is needed.”

Inventories tracked by trading exchanges are near historical lows. And recent price volatility means that production from new mines — set to phase out as early as 2024 — could become even tighter in the near term. Just a few days ago, mining giant Newmont Corp. Plans for $2 billion gold and copper project in Peru put on hold. Freeport-McMoRan Inc., the world’s largest publicly traded copper supplier, has warned that prices are now “insufficient” to support new investment.

Commodity experts have been warning of a possible copper crisis for months, if not years. And the recent market downturn will exacerbate future supply problems — by creating a false sense of security, choking off cash flow and discouraging investment. It takes at least 10 years to develop and commission a new mine, which means the decisions producers make today will help define supply for at least a decade.

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

Why is copper important?

Copper is essential to modern life. An average car weighs about 65 pounds (30 kilograms), and more than 400 pounds goes into a single family home.

The metal that is considered the benchmark for power lines is also the key to a greener world. While much of the attention has focused on lithium – a key component in today’s batteries – the energy transition is fueled by a variety of commodities, including nickel, cobalt and steel. When it comes to copper, millions of feet of copper wire will be critical to bolstering the world’s power grids, and tons and tons will be needed to build wind and solar farms. According to the Copper Alliance, electric vehicles use more than twice as much copper as gasoline-powered cars.

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How big will the shortage get?

As the world goes electric, net-zero emissions targets will double demand for the metal to 50 million tons annually by 2035, according to an industry-funded study by S&P Global. While this forecast is largely hypothetical, as copper cannot be consumed if it is unavailable, other analysis also points to the potential for an increase. BloombergNEF estimates that demand will increase by more than 50% from 2022 to 2040.

Meanwhile, mine supply growth will peak around 2024 due to a lack of new projects in the works and existing sources drying up. That’s a scenario where the world could see a historic deficit of up to 10 million tons in 2035, according to S&P Global research. According to a report released this month, Goldman Sachs Group Inc. estimates that miners will need to spend about $150 billion over the next decade to solve an 8 million ton deficit. BloombergNEF predicts that the mining output gap could reach 14 million tons by 2040, which would need to be filled by recycling metal.

To illustrate how massive this shortage would be, consider that according to the International Copper Study Group, the global deficit in 2021 was 441,000 tonnes, which is less than 2% of refined metal demand. That was enough to send prices up about 25% this year. Recent worst-case forecasts from S&P Global show that the deficit will be equivalent to around 20% of consumption in 2035.

What does this mean for prices?

“It’s going to be 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.

How are prices going?

Goldman Sachs forecasts the London Metal Exchange benchmark price to nearly double in 2025 to an annual average of $15,000 per tonne. Copper was trading at $7,690 a tonne on the LME on Wednesday.

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

Of course, all of these mega-demand forecasts are based on the idea that governments will continue to push the net-zero targets that are sorely 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).

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And there’s also a common adage in commodity markets that might come into play: high prices are the cure for high prices. While copper is down from the March record, it’s still trading about 15% above its 10-year moving average. Eventually, if prices continue to rise, it will push the clean energy industry to find ways to reduce metal consumption or even look for alternatives, according to Ken Hoffman, co-lead of the EV battery materials research group at McKinsey & Co.

Scrap supply can help fill gaps in mine production, especially when prices rise, which “will result in more recycled metals entering the market,” said Sung Choi, an analyst at BloombergNEF. S&P Global points out that as more copper is used in the energy transition, it also opens up more “opportunities for recycling”, for example when electric vehicles are scrapped. Recycled production 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 crisis also underscores why the chief economist at BHP Group, the world’s largest mining company, said just this month copper faces a “bumpy” road ahead due to demand concerns. Citigroup Inc. expects copper to fall in the coming months due to a recession particularly fueled by Europe. The bank has a forecast of $6,600 in the first quarter of 2023.

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

If China’s real estate sector shrinks significantly, “structurally, that’s less copper demand,” said Timna Tanners, an analyst at Wolfe Research. “For me, that’s just an important balance” to the consumption projections, which are based on net-zero targets, she said.

But even a recession means only a “delay” in demand and will not “materially affect” consumption forecasts for 2040, according to an Aug. 31 presentation by BloombergNEF. That’s because so much future demand is “legislation” by governments’ focus on green goals, making copper less dependent on the broader global economy than it used to be, Wells Fargo’s LaForge said.

Also, there is little room for maneuver on the supply side of the equation. The physical copper market is already so tight that, despite the collapse in futures prices, premiums paid for immediate delivery of the metal have risen.

What is holding back supplies?

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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 revenues are falling due to production difficulties.

In mature mines, the quality of the ore will degrade, meaning production will either drop or more rock will have to be processed to produce the same amount. And meanwhile, the industry’s pipeline of dedicated projects dries up. Finding and developing new deposits is becoming increasingly difficult and expensive. In Peru and Chile, which together account for more than a third of global production, some mining investments have stalled, partly due to regulatory uncertainty as politicians seek a larger share of profits to address economic disparities.

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

Global supplies are already so scarce that producers are trying to squeeze tiny nuggets out of waste rock. In the US, companies encounter licensing obstacles. While in Congo the weak infrastructure limits the growth potential for large deposits.

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And then there’s this major contradiction when it comes to copper: The metal is essential to a greener world, but digging it out of the ground can be a pretty messy process. At a time when everyone from local communities to global supply chain managers is raising their awareness of environmental and social issues, it is becoming increasingly difficult to obtain approvals for new projects.

The cyclical nature of the resource industry also means producers are under pressure to keep their balance sheets strong and reward investors rather than aggressively pursuing growth.

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

Even if producers switch gears and suddenly start pouring money into new projects, the long lead time for mines means the supply outlook for the next decade is pretty much set.

“The near-term situation contributes to the longer-term better prospects as it impacts supply development,” Freeport-McMoRan CEO Richard Adkerson said in an interview. And in the meantime, “everywhere the world is becoming more electrified,” he said, which inevitably brings with it “a new era of demand.”

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