More than ever, the world is dependent on
copper to transmit the electricity that drives economies.
Traditional key demand drivers for the red
metal - global population growth and urbanization – have continued even with
the Covid-19 situation. However, a new growth layer is rapidly emerging in the
form of major new investment in the green economy. Governments the world over
do not just consider decarbonization as a means to combat climate change, they
view it as critical to restarting their ailing economies.
That’s where copper – the original electric
metal – starts to shine. Electric vehicles (EV), EV charge stations, renewable
energy installations, battery storage… these have all helped increase the
requirement for copper in the past year.
The world was already trending towards
decarbonization prior to the pandemic but the events of the past eighteen
months have supercharged the drive to move away from fossil fuels.
Unsurprisingly, analysts expect copper
demand to more than double by 2050 and whereas the copper price was previously
rising at about 3-3.5% annually, it now looks as if that percentage might be
higher at around 4.5-5%.
Despite the rosy outlook, the reality is the
past ten years have generally been a bear market for copper caused by an acute
oversupply. The origins of the surplus copper units resulted from an
overreaction among miners to the Chinese commodity supercycle.
Miners opened their chequebooks in a hurry
to get in on the seemingly never-ending demand from China’s unprecedented infrastructure
buildout. However, following the Great Financial Crisis of 2008 and slowing
growth in China in the 2010s, the market became awash with surplus copper.
The copper price fell from US$4.50 in 2012
to $2.00 in 2015, hitting the same low again in March 2020 as the world paused
to take stock of the pandemic.
Most new copper deposits with economic
assessments require a sustained price of around $3.50/lb to justify the capital
expenditure. With prices languishing low for so long, most major mining
companies stopped building new copper mines and delayed planned expansions.
Now, add to that mix the rising cost and
complexity of finding ever more remote deposits, the associated high capital
costs to get these deposits permitted, the increasing weight of social impacts,
heightened sensitivities towards scarce resources such as water…. Suddenly it’s
no surprise that the supply side of copper is ill equipped to meet forecast
demand.
The Pipeline is all but Empty
After decades of underinvestment, the
major, near-term development pipeline is bare. At the current rate, global
copper output is estimated to peak in about 24 months, and most of the growth
remaining is from high-risk projects in challenging jurisdictions.
Even historically reliable sources of
copper, such as Chile, are now uncertain, given the considerable grade decline
in its old mines and recent regional unrest.
A time is quickly approaching where there will
not be enough new copper supply coming down the supply chain to meet all that
new demand. Prices have to go up, and we've seen it happen in recent months. Over
the past 12 months, the copper price has more than doubled from around $2.00/lb,
to a 10-year high of $4.30/lb in February.
Despite higher copper prices for the past
nine months, that has not yet prompted companies like Rio Tinto to start
building new mines. They are, almost certainly, trying to determine if prices
will stay at these levels long enough to incentivize development and perhaps
even justify mergers and acquisitions.
The growth looks set to stay. So, should
investment in new production be kicked further down the road, it seems likely
to only sharpen the curve where upwards-bound copper prices are concerned.
We've already seen the equities of several
promising copper companies rise in value on the stock exchanges but there are
still no indications of genuine, imminent action by the mining industry. Thus,
for anyone looking to cash in on the economic growth promised by the green
economy, companies with strong copper assets have the potential to deliver a
substantial return on investment.
Anthony Milewski
About Anthony
Milewski
Mr.
Anthony Milewski
is the Chairman of Nickel 28 Capital Corp. He
has spent his career in various aspects of the mining industry, including as a
company director, advisor, founder and investor. In particular, he has been active in the
commodities related to decarbonization and the energy transition, including
nickel, cobalt, copper and carbon credits. Anthony has served on the London
Metals Exchange Cobalt Committee, which includes representatives from the
largest mining and commodities companies globally, to represent the interests
of the industry to the board of directors the LME. Anthony Milewski previously
worked at Renaissance Capital and Skadden, Arps, Slate, Meagher & Flom LLP
in Moscow, where he focused on advisory and transactional work in metals &
mining and oil & gas sectors. He has
lived and worked in Africa and Russia, including a year as a Fulbright scholar,
and has spent considerable time in Central Asia. Mr. Milewski holds a B.A. in
Russian history from Brigham Young University, an M.A. in Russian and Central Asian
Studies from the University of Washington, and a J.D. from the University of
Washington.