You wouldn't know it from looking at the market today, but some of the largest miners and metals traders are warning that in just a couple of years' time, a massive shortfall will emerge for the world's most critical metal \u2014 one that could itself hold back global growth, stoke inflation by raising manufacturing costs and throw global climate goals off course. The recent downturn and the under-investment that ensues only threatens to make it worse.<\/p>\n\n\n\n
\u201cWe'll look back at 2022 and think, \u2018Oops,\u2019\u201d said John LaForge, head of real asset strategy at Wells Fargo. \u201cThe market is just reflecting the immediate concerns. But if you really thought about the future, you can see the world is clearly changing. It's going to be electrified, and it's going to need a lot of copper.\u201d<\/p>\n\n\n\n
Inventories tracked by trading exchanges are near historical lows. And the latest price volatility means that new mine output \u2014 already projected to start petering out in 2024 \u2014 could become even tighter in the near future. Just days ago, mining giant Newmont Corp. shelved plans for a $2 billion gold and copper project in Peru. Freeport-McMoRan Inc., the world's biggest publicly traded copper supplier, has warned that prices are now \u201cinsufficient\u201d to support new investments.<\/p>\n\n\n\n
Commodities experts have been warning of a potential copper crunch for months, if not years. And the latest market downturn stands to exacerbate future supply problems \u2014 by offering a false sense of security, choking off cash flow and chilling investments. It takes at least 10 years to develop a new mine <\/p>\n\n\n\n
and get it running, which means that the decisions producers are making today will help determine supplies for at least a decade.<\/p>\n\n\n\n
\u201cSignificant investment in copper does require a good price, or at least a good perceived longer-term copper price,\u201d Rio Tinto Group Chief Executive Officer Jakob Stausholm said in an interview this week in New York.<\/p>\n\n\n\n
Why Is Copper Important?<\/p>\n\n\n\n
Copper is essential to modern life. There\u2019s about 65 pounds (30 kilograms) in the average car, and more than 400 pounds go into a single-family home.<\/p>\n\n\n\n
The metal, considered the benchmark for conducting electricity, is also key to a greener world. While much of the attention has been focused on lithium \u2014 a key component in today\u2019s batteries \u2014 the energy transition will be powered by a variety of raw materials, including nickel, cobalt and steel. When it comes to copper, millions of feet of copper wiring will be crucial to strengthening the world\u2019s power grids, and tons upon tons will be needed to build wind and solar farms. Electric vehicles use more than twice as much copper as gasoline-powered cars, according to the Copper Alliance.<\/p>\n\n\n\n
How Big Will the Shortage Get?<\/p>\n\n\n\n
As the world goes electric, net-zero emission goals will double demand for the metal to 50 million metric tons annually by 2035, according to an industry-funded study from S&P Global. While that forecast is largely hypothetical given all that copper can't be consumed if it isn't available, other analyses also point to the potential for a surge. BloombergNEF estimates that demand will increase by more than 50% from 2022 to 2040.<\/p>\n\n\n\n
Meanwhile, mine supply growth will peak by around 2024, with a dearth of new projects in the works and as existing sources dry up. That\u2019s setting up a scenario where the world could see a historic deficit of as much as 10 million tons in 2035, according to the S&P Global research. Goldman Sachs Group Inc. estimates that miners need to spend about $150 billion in the next decade to solve an 8 million-ton deficit, according to a report published this month. BloombergNEF predicts that by 2040 the mined-output gap could reach 14 million tons, which would have to be filled by recycling metal.<\/p>\n\n\n\n
To put in perspective just how massive that shortage would be, consider that in 2021 the global deficit came in at 441,000 tons, equivalent to less than 2% of demand for the refined metal, according to the International Copper Study Group. That was enough to send prices jumping about 25% that year. Current worst-case projections from S&P Global show that 2035\u2019s shortfall will be equivalent to about 20% of consumption.<\/p>\n\n\n\n
As for what that means for prices?<\/p>\n\n\n\n
\u201cIt\u2019s going to get extreme,\u201d said Mike Jones, who has spent more than three decades in the metal industry and is now the CEO of Los Andes Copper, a mining exploration and development company.<\/p>\n\n\n\n
Where Are Prices Heading?<\/p>\n\n\n\n
Goldman Sachs forecasts that the benchmark London Metal Exchange price will almost double to an annual average of $15,000 a ton in 2025. On Wednesday, copper settled at $7,690 a ton on the LME.<\/p>\n\n\n\n
\u201cAll the signs on supply are pointing to a fairly rocky road if producers don\u2019t start building mines,\u201d said Piotr Kulas, a senior base metals analysts at CRU Group, a research firm.<\/p>\n\n\n\n
Of course, all those mega-demand forecasts are predicated on the idea that governments will keep pushing forward with the net-zero targets desperately needed to combat climate change. But the political landscape could change, and that would mean a very different scenario for metals use (and the planet).<\/p>\n\n\n\n
And there\u2019s also a common adage in commodity markets that could come into play: high prices are the cure for high prices. While copper has dropped from the March record, it\u2019s still trading about 15% above its 10-year average. If prices keep climbing, that will eventually push clean-energy industries to engineer ways to reduce metals consumption or even seek alternatives, according to Ken Hoffman, the co-head of the EV battery materials research group at McKinsey & Co.<\/p>\n\n\n\n
Scrap supply can help fill mine-production gaps, especially as prices rise, which will \u201cdrive more recycled metals to appear in the market,\u201d said Sung Choi, an analyst at BloombergNEF. S&P Global points to the fact that as more copper is used in the energy transition, that will also open more \u201copportunities for recycling,\u201d such as when EVs are scrapped. Recycled production will come to represent about 22% of the total refined copper market by 2035, up from about 16% in 2021, S&P Global estimates.<\/p>\n\n\n\n
The current global economic malaise also underscores why the chief economist for BHP Group, the world\u2019s biggest miner, just this month said copper has a \u201cbumpy\u201d path ahead because of demand concerns. Citigroup Inc. sees copper falling in the coming months on a recession, particularly driven by Europe. The bank has a forecast for $6,600 in the first quarter of 2023.<\/p>\n\n\n\n
And the outlook for demand from China, the world\u2019s biggest metals consumer, will also be a key driver.<\/p>\n\n\n\n
If China\u2019s property sector shrinks significantly, \u201cthat's structurally less copper demand,\u201d said Timna Tanners, an analyst at Wolfe Research. \u201cTo me, that's just an important offset\u201d to the consumption forecasts based on net-zero goals, she said.<\/p>\n\n\n\n
But even a recession will only mean a \u201cdelay\u201d for demand, and it won\u2019t \u201csignificantly dent\u201d the consumption projections going into 2040, according to a presentation from BloombergNEF dated Aug. 31. That\u2019s because so much of future demand is being \u201clegislated in,\u201d through governments\u2019 focus on green goals, which makes copper less dependent on the broader global economy than it used to be, said LaForge of Wells Fargo.<\/p>\n\n\n\n
Plus, there\u2019s little wiggle room on the supply side of the equation. The physical copper market is already so tight that despite the slump in futures prices, the premiums paid for immediately delivery of the metal have been moving higher.<\/p>\n\n\n\n
What\u2019s Holding Back Supplies?<\/p>\n\n\n\n
Just take a look at what\u2019s happening in Chile, the legendary mining nation that\u2019s long been the world\u2019s largest supplier of the metal. Revenue from copper exports is falling because of production struggles.<\/p>\n\n\n\n
At mature mines, the quality of ore is deteriorating, meaning output either slips or more rock has to be processed to produce the same amount. And meanwhile the industry\u2019s pipeline of committed projects is running dry. New deposits are getting trickier and pricier to both find and develop. In Peru and Chile, which together account for more than a third of global output, some mining investments have stalled, partly amid regulatory uncertainty as politicians seek a greater portion of profits to resolve economic inequalities.<\/p>\n\n\n\n
Soaring inflation is also driving up the cost of production. That means the average incentive price, or the value needed to make mining attractive, is now roughly 30% higher than it was 2018 at about $9,000 a ton, according to Goldman Sachs.<\/p>\n\n\n\n
Globally, supplies are already so tight that producers are trying to squeeze tiny nuggets out of junky waste rocks. In the US, companies are running into permitting roadblocks. While in the Congo, weak infrastructure is limiting growth potential for major deposits.<\/p>\n\n\n\n
And then there\u2019s this great contradiction when it comes to copper: The metal is essential to a greener world, but digging it out of the earth can be a pretty dirty process. At a time when everyone from local communities to global supply chain managers are heightening their scrutiny of environmental and social issues, getting approvals for new projects is getting much harder.<\/p>\n\n\n\n
The cyclical nature of commodity industries also means producers are facing pressure to keep their balance sheet strong and reward investors rather than aggressively embark on growth.<\/p>\n\n\n\n
\u201cThe incentive to use cash flows for capital returns rather than for investment in new mines is a key factor leading to a shortage of the raw materials that the world needs to decarbonize,\u201d analysts at Jefferies Group LLC said in a report this month.<\/p>\n\n\n\n
Even if producers switch gears and suddenly start pouring money into new projects, the long lead time for mines means that the supply outlook is pretty much locked in for the next decade.<\/p>\n\n\n\n
\u201cThe short-term situation is contributing to the stronger outlook longer term because it's having an impact on supply development,\u201d Richard Adkerson, CEO of Freeport-McMoRan, said in an interview. And in the meantime, \u201cthe world is becoming more electrified everywhere you look,\u201d he said, which inevitably brings \u201ca new era of demand.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
(Bloomberg) -- The price of copper \u2014 used in everything from computer chips and toasters to power systems and air conditioners \u2014 has fallen by nearly a third since March. Investors are selling on fears that a global recession will stunt demand for a metal that's synonymous with growth and expansion. You wouldn't know it […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_seopress_robots_primary_cat":"none","_seopress_titles_title":"","_seopress_titles_desc":"","_seopress_robots_index":"","footnotes":""},"categories":[2,1],"tags":[],"_links":{"self":[{"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/posts\/193"}],"collection":[{"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/comments?post=193"}],"version-history":[{"count":1,"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/posts\/193\/revisions"}],"predecessor-version":[{"id":195,"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/posts\/193\/revisions\/195"}],"wp:attachment":[{"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/media?parent=193"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/categories?post=193"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/geologicaresource.com\/wp-json\/wp\/v2\/tags?post=193"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}