For more than a decade, some have warned peak copper is on the horizon. Is the world really running out of the red metal?
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- 7 Basic Copper Facts for Investors
- 5 Major Copper Uses
- A Look at Historical Copper Prices
- The Copper Price Today: A Brief Overview
- LME Copper vs. COMEX Copper
- What are Copper Futures?
- 3 Copper ETFs and ETNs
- Top Copper Production by Country
- 5 Top Copper Reserves by Country
- Economics of the Copper Scrap Market
- Is Peak Copper Coming?
- Types of Copper Deposits in the World
- Copper Ore Types: Sulfides vs. Oxides
- Copper Refining: From Ore to Market
Markets and supply chains across the commodities spectrum have taken hits from the COVID-19 pandemic. 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 isn’t the year copper supplies will 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 to 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 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. As of the close of August 2020, the red metal was trading at US$3.07 per pound (US$6,757 per tonne); that’s up 10 percent since the beginning of the year and 58 percent since the COVID-19 lows that hit much of the metals market in March.
Going forward, a long period of undersupply is expected in the copper space, and has the potential to send prices even higher in 2021.
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. But according to a 2019 report out of the University of Iceland, “copper will not run into physical scarcity in the future.”
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 this year’s 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.
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 tightens supply
The worldwide COVID-19 crisis has further impacted the copper supply crunch. “2020 has already seen capex guidance cuts from copper miners and the mine project pipeline is shrinking due to lockdown-related delays,” said Eurasian Resources Group (ERG) CEO Benedikt Sobotka in July 2020.
Bruce Alway, director of metal research at Refinitiv, is also concerned about the coronavirus’ impact on copper. “We have recorded sizeable losses for both copper and zinc at the mine level, which at the peak saw around 110 operations affected,” he said as part of a recent webinar.
Alway said Refinitiv is looking for a mine supply loss of 4 percent compared to 2019, or a drop of more than 800,000 tonnes year-on-year. The world’s first and second biggest copper producers, Peru and Chile, along with the US, are predicted to experience the biggest drops in production.
“This represents a (fall of) 550,000 tonnes from our pre-COVID-19 forecast made at the start of 2020, when we were still looking for a decrease, but only a marginal one,” he added.
London-based metals research firm Roskill expects disruptions to mine supply to reach 750,000 tonnes to 1 million tonnes of copper in 2020.
There are also clear signals of tightening further down the supply chain, most notably in China, the world’s largest consumer and third largest producer of copper. Midway through 2020, Jonathan Barnes, associate consultant for copper at Roskill, reported that total visible copper stocks on exchanges and in warehouses had fallen 40 percent from March to below 600,000 tonnes at the end of July. This represents the lowest copper inventories in London Metal Exchange warehouses in 13 years.
“China is importing more refined metal from nearly every country suggesting a structural shift not a temporary change,” said Barnes. “If you are looking for signs of panic buying, you can find evidence of that in China — total Chinese stocks represent less than two weeks’ consumption at current rates of use.”
While peak copper may not be a factor, the fundamentals supporting the market are here to stay for the long term. ERG’s Sobotka sees the electric vehicle sector adding 1.5 million tonnes of demand over the next decade on top of demand from expanding digital infrastructure. China plans to invest US$3.5 billion in digital infrastructure in 2020, which includes power-intensive data centers and 5G networks.
Robust demand and weak supply are bound to drive copper prices higher. Roskill’s Barnes expects the copper price will likely rise further towards the end of 2020, and believes the current environment has strong parallels to the rebound in the copper price after the global financial crisis. “Looking even further ahead, the supply impact of the coronavirus will extend far beyond this year,” said Sobotka.
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.
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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.