A Copper timing mismatch leaves the market vulnerable to supply shocks
The world’s transition to renewable energy faces a significant challenge as copper prices experience a prolonged decline. Copper, a crucial component for electric vehicles, wind turbines, and power grids, is essential for the green energy movement. However, the current slump in demand, particularly from manufacturers and builders, coupled with the slow pace of decarbonization, is creating a temporary surplus, keeping copper prices low and discouraging the necessary investments to meet the increasing demands of renewable energy sources.
This timing mismatch between current low demand and future high demand leaves the market vulnerable to a potential supply shock, leading to price spikes and shortages. Factors contributing to the decline in copper prices include a weaker-than-expected pandemic recovery in China, the world’s largest copper consumer, a strengthening dollar, a slowing global manufacturing sector, and the resolution of supply disruptions in major producing countries like Chile and Peru.
Copper futures have seen a 15% decline over the past 10 months, reaching approximately $3.60 per pound compared to over 4 dollars in January 2023. Some mining firms are hesitant to commit to significant new investments until prices rise. Meanwhile, analysts, including Goldman Sachs metals strategist Nicholas Snowdon, expect a spike in copper prices.
Investment in new mines is urgently needed to support the green energy transition
While builders of new energy sources, batteries, and power lines demand more copper, they still account for less than 10% of global usage. However, the green energy market, driven by China’s significant investments in renewable energy and electric vehicles, plays a vital role in sustaining copper demand. Analysts argue that investments in new mines are urgently needed, as developing new mines takes years to get into production. McKinsey & Co. forecasts a copper shortfall of 6.5 million metric tons in 2031.
Goldman Sachs predicts a growing supply gap, projecting copper prices to reach $4.50 per pound within a year and exceed $6.80 per pound by 2025. However, there are concerns that prices could decline in the coming months due to incoming new supplies such as the expansion of the Kamoa Kakula mine in DRC and Grasberg in Indonesia, and softness in the 90% of demand that is unrelated to the green energy transition. Economic challenges, such as the Eurozone bracing for a recession and signs of China’s economic slowdown, contribute to this uncertainty.
How have investors responded to the copper price?
French cable supplier Nexans, a key player in the green energy transition, acknowledges the increased demand for copper in clean energy projects. However, Chief Executive Officer, Christopher Guérin, expresses concern about future shortages and adopts a cautious approach to buying copper to avoid speculation.
Speculators on the London Metal Exchange are exhibiting bearish sentiment, with more bearish bets than bullish ones for the first time in a decade. Despite this, many institutional investors prefer buying shares of copper producers rather than holding copper futures, expressing confidence in the miners’ prospects, even if copper prices remain range-bound.
Copper developers are moving forward with their plans, expecting a supply crunch
“There is a delicate balance between supply and demand in the copper market and its profound impact on the green energy transition. The slump in copper prices, driven by various global economic factors, raises concerns about the ability to meet the increasing demand for renewable energy technologies. This highlights some of the challenges faced by mining firms, the urgency for investments in new mines, and the potential consequences of a future copper shortage,” says Andrew Brodkey, Chief Operating Officer of Idaho Copper Corp.
Idaho Copper Chief Executive Officer, Steven Rudofsky, echoes Andrew’s sentiments stating that the reliance on China as a major consumer and investor in renewable energy adds a layer of complexity to the market dynamics and calls for more investment support for US-based copper developers.
“There is a strong need for proactive measures, including strategic investments, to ensure a smooth transition to a greener future. Technological innovations and advancements in ore processing offer hope for addressing the supply gap, but the timeline for such solutions remains uncertain,” says Steven.
Idaho Copper (OTC: COPR) is one example of a copper developer who is turning to more innovative mining techniques to reduce the costs of copper mining as investors become more discerning. The company is using ore sorting in the development of its CuMo Project, one of the top five largest undeveloped copper mines in the USA by resources.
Ore sorting is the process of identifying and removing waste and below-grade ore before processing. This allows the mining company to produce a higher, more stable head-grade feed and usually reduces the overall processing costs while improving the value of the concentrate.
A coordinated approach from government and industry is needed if we are to realise a green energy transition
The challenges facing the copper markets and their implications for the green energy transition are immense. The cautious approach of companies like Nexans and the perspective of investors, as exemplified by the buying activity on the LME, reflects the prevailing uncertainty in the market.
The interconnectedness of global economic factors, and their impact on copper prices, underscores the importance of a coordinated and strategic approach by governments and industries alike. It calls for attention to the urgent need for investment, technological innovations, strategic planning, and support of local developers like Idaho Copper and others, to ensure the availability of copper for the critical components of the renewable energy sector.