For more than a decade, some have warned peak copper is on the horizon. Is the world really running out of the red metal?
Markets and supply chains across the commodities spectrum have taken hits from the COVID-19 pandemic. The base metal copper is no exception. Now, some analysts are once again calling for peak copper in much the same way as others have voiced concerns over peak oil or peak gold.
After the 2008 recession, copper surprised everyone with its rapid ascent — propelled by China's stockpiling program, it hit record-high prices. In 2011, concerns that peak copper was on the horizon were exacerbated by the rapid industrialization seen in China. As the Asian powerhouse's copper demand skyrocketed, copper stockpiles had a tough time meeting the increased demand.
That raised the question of when the market will reach peak copper. The predictions surrounding the timing of peak copper were are all over the map, ranging from 2020 to 2100.
While it's clear now that 2020 wasn't the year copper supplies would peak, there are still signs in the red metal's fundamentals that a tight supply scenario — and higher prices — is on the horizon. Unlike peak oil, which was reversed with the help of fracking, no such technological advancements are available for copper production, and there are no viable alternatives for the metal across its many industrial uses.
Peak copper: China's key role in demand
In the past decade, strong growth from China has resulted in accelerated copper demand. In a market already known to operate on thin margins, Chinese demand has quickly created a copper supply deficit. The potential for other emerging markets to enter periods of rapid growth is also fueling speculation that increased demand for copper has only just begun.
Furthermore, interest in copper as an asset class has been piqued, and prices are now being impacted by investment demand in addition to traditional physical demand. Copper is deemed a strategic asset in China, and it provides a way to diversify from the US dollar and US treasuries.
In 2011, the tightening balance between copper supply and demand resulted in a rapid rise in the red metal's prices. Copper hit a low of US$1.32 per pound (US$2,910.09 per tonne) in January 2009, then surged to US$3.55 per pound (US$7,826.40 per tonne) by April 2010 on its way to an all-time peak of $4.58 per pound (more than $10,097 per tonne) in February 2011.
Copper prices have mostly traded under the US$3 (US$6,600) level for the past decade. However, a looming supply crunch, exacerbated by coronavirus-related supply disruptions, is pushing prices up again. The price of copper reached an all-time high in the second quarter of 2021, trading above US$10,700 per tonne.
Going forward, a long period of undersupply is expected in the copper space, and that has the potential to send prices even higher in 2022 and beyond.
Peak copper: Why supply is lagging
While copper demand is expected to rise, supply may not keep pace. This is resulting in speculation that we are on the path to peak copper. However, according to a 2019 report out of the University of Iceland, the researchers believe that focus on recycling copper scrap will help delay peak copper.
The Copper Development Association pegs the current known worldwide copper ore resources at nearly 5.8 trillion pounds, of which only about 0.7 trillion pounds, or 12 percent, have been mined throughout history. Plus, nearly all of that mined copper is still in circulation, as the red metal's recycling rate is higher than that of any other engineering metal.
So why is the market faced with a supply deficit? The copper supply deficit isn't due to a lack of available copper to mine, it was caused by complications in bringing high-quality copper to the market.
In an interview with Rick Rule at the 2020 Sprott Natural Resource Symposium, Robert Friedland of Ivanhoe Mines (TSX:IVN,OTCQX:IVPAF) said, "The copper price probably needs to double its current price for the average low-grade copper porphyry in Peru or in Chile to become viable."
Similarly, back in 2019, Reuters reported, "The copper industry has suffered from years of underinvestment, and it is now working feverishly to develop new mines and bring fresh supply online as the electrification trend envelops the global economy." Expected global copper shortages have major end users of copper worried about the security of their supply chains.
"There are (copper) deficits being forecast by many of the brokerage firms — Goldman Sachs (NYSE:GS) is one of the ones leading that," Rob McEwen, chairman and chief owner of McEwen Mining (TSX:MUX,NYSE:MUX), told INN in an interview."I feel that the demand for copper is going to increase with the growth of Asia, with the growth and the proliferation of electric vehicles and (copper's) use in regenerative energy. I think we're entering a strong period of demand for copper."
McEwen Mining recently created McEwen Copper, a subsidiary spinoff of the company's copper assets including the Los Azules project in Argentina.
It's worth noting that copper exploration and mining require a great deal of capital investment. The last major investment cycle was in the 1970s, and although we are currently in a cycle of increased exploration spending, new discoveries are few and far between, and have not been enough to compensate for the decline in ore grades from the larger, older mines.
The other big factor impacting new supply to the market is the time it takes to get a new mine into production. First, an economically viable reserve has to be discovered, and then this discovery has to be developed. Many projects don't even make it past this point. Often, by the time a mine is about to be constructed, the metal's price collapses and the project is abandoned.
What's more, miners that make it past the point of exploration and into construction and mining are faced with a multitude of potentially time-consuming delays, including everything from equipment shortages to permitting problems.
Peak copper: COVID-19 further tightened supply
The worldwide COVID-19 crisis has further impacted the copper supply crunch. In July 2020, Eurasian Resources Group CEO Benedikt Sobotka noted that the impact of the pandemic had shrunk the mine project pipeline due to lockdown-related delays and capital expenditure guidance cuts from copper miners. Sobotka warned that the supply impact of the coronavirus will extend far beyond 2020.
Speaking at a webinar that same month, Bruce Alway, director of metal research at Refinitiv, said, "(There are) sizeable losses for both copper and zinc at the mine level, which at the peak saw around 110 operations affected."
Moving ahead, S&P Global Market Intelligence commodity expert Thomas Rutland stated, "We forecast consumption will outstrip production over the period to 2024, resulting in a growing refined market deficit and increasing copper prices."
Bloomberg reported in October 2021 "Copper's immediate prospects are supported by low inventories, while the shift to low-carbon energy sources paints a rosy picture for the longer term." However, on the other side of the equation, "global shipping bottlenecks and energy shortages in China and Europe are dimming the demand outlook heading into next year."
There are also clear signals further down the supply chain, most notably in China, the world's largest consumer and third largest producer of copper. The slowdown in China's property sector as a result of the debt crisis in the country's real estate market has been the biggest factor influencing the global copper market in 2021 outside of the COVID-19 pandemic.
So is peak copper really coming? Perhaps not yet, but it's clear the supply and demand situation could remain tight, leaving a market that's potentially ripe for investment. If you'd like to learn more about copper's fundamentals, click here to read our introductory guide.
Don't forget to follow us @INN_Resource for real-time news updates!
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.