Industry insights: can the copper market hold its mettle as demand intensifies?

Although COVID-19-related disruption caused supply issues and transportation bottlenecks, there is a bigger narrative around copper, with “modest deficits” still projected this year, a former EVP at Vale Canada Ltd said. “I think the fact is, on the demand side, we saw much less effect from the pandemic than on the supply side.” In another Interview, a former analytics manager at Anglo American plc noted that copper has actually been in deficit for three years. “And these deficits are not inconsequential,” they said. “They’re pretty large numbers.” 

Indeed, the specialist cited data from the International Copper Study Group showing a combined deficit of over one million tonnes in 2018 and 2019. With years of deficits building tension into supply chains, the pandemic has triggered a tipping point, we heard. “We’ve seen it in palladium, for example, in recent years and… we probably are at that point now with copper.” 

As governments embark on large-scale stimulus spending to invigorate economies following pandemic lockdowns, copper is expected to play a pivotal role in industrial transformations as a key material for innovation. But with deficits, declining mine grades and lack of investment in new supply, many commentators have raised concerns about there not being enough to meet rising demand.

Citing Bernstein analysts, the Financial Times reported that demand from renewables and electric vehicles (EVs) is projected to increase seven-fold by the 2050s — if global net zero greenhouse gas emissions targets are met.¹https://www.ft.com/content/c8305fd5-1dda-41cc-a7d2-b1476408ec43 We’re told that wind and solar power are “at least twice as [copper] intensive as other forms of power generation like nuclear, hydro and thermal”. And given the need for undersea cabling, copper use is over seven times more intensive for offshore wind, the former Anglo American analytics manager said. 

The former Vale Canada EVP can also “say with some confidence” that copper will play a major role in the continued development of the EV space, as EVs are much more copper-intensive than traditional internal combustion engine cars. “I’d estimate the EVs and accompanying infrastructure will probably require approximately 2 million tonnes of additional copper supply… by 2025, and that could increase to 6 million tonnes by 2030.” (See here for a recent article on EVs).

However, they noted that “the impact will be material, but not dramatic”, considering the size of the copper market. “If you look at other metals, such as nickel, you see a much more dramatic effect, with the need for upwards of 750,000 tonnes by 2025 in a 2 million tonne market.” Although copper is certainly going to benefit from the EV revolution, the expert doesn’t see it as “game-changing”, as is the case with other metals. However, it can still have a significant impact on price, “mainly due to the already fairly tight supply-demand balance that we see in traditional applications”. 

Forum Interviews also shed light on other developments to watch in the copper market. One suggested mid-tier and major players are “actively looking at potential M&A opportunities”, but that the problem today is “valuations are pretty high”. Another observation was that, with the events of 2020 reinforcing how devastating supply-chain disruption can be, there could be an upcoming trend whereby midstream players seek opportunities for vertical integration. 

Additionally, environmental, social and governance (ESG) considerations are set to become increasingly important to the mining industry at large, with investors paying close attention to an array of indicators. Recent incidents such as Rio Tinto’s destruction of ancient caves in Australia have thrown the spotlight on ESG practices. Dam collapses, workplace fatalities and mining practices such as deep-sea tailings are also adding to mounting pressure.   

There are also political factors at play. Labour disputes, primarily in Chile, disrupted copper production in 2020 and remain an issue even as production ramps up. With Chile and Peru accounting for over 40% of global production, large-scale disruption can have a dramatic impact on supply and price. The former Vale Canada EVP believes labour strikes are a “distinct possibility” with upcoming elections and contract negotiations this year and next as unions demand a bigger piece of the pie.  

Despite concerns about tightening supply-demand dynamics, the overall outlook for copper is positive, Interviews suggest. The former Vale Canada EVP foresees a mining supercycle coming into play over the next couple of years off the back of the “tremendous” investments in infrastructure and decarbonisation. “Although we have a relatively balanced supply and demand scenario today, and probably for the next couple of years before we start to see really big deficits, the whole forward-looking story is very compelling for copper,” they said. 

In fact, as production gains momentum in H2 2020 and into 2022, modest surpluses of 200,000 or 300,000 tonnes could be created. We’re told prices “could soften” but are expected to remain fairly steady this year, with disruption most likely to predicate further short-term spikes. China will continue to be a key driver of demand, but there will also be increased spending in Europe and North America, which have signalled considerable expenditures on infrastructure, decarbonisation and electrification. 

In many ways, it’s copper’s time to shine. According to the former Vale Canada EVP, it has “all of the elements of a market that’s going to remain tight and it’s going to be good for prices over the longer term”.

*For context, on 28.02.2020 the price of copper was USD 5,571 (as per LME).