No decarbonisation without copper. After a year of the global pandemic, with its supply chain disruptions, race for PPE, testing kits and vaccines, the critical importance of securing sufficient raw materials in combating society’s problems has never been more in focus. This importance extends to the next greatest challenge of our time: climate change. The critical role copper will play in achieving the Paris climate goals cannot be understated. Without serious advancements in carbon capture and storage technology in the coming years, the entire path to net zero emissions will have to come from abatement - electrification and renewable energy. As the most cost-effective conductive material, copper sits at the heart of capturing, storing and transporting these new sources of energy. In fact, discussions of peak oil demand overlook the fact that without a surge in the use of copper and other key metals, the substitution of renewables for oil will not happen. Though much ink has been spilled discussing the stranding of hydrocarbon assets, in our view there has been insufficient focus on securing the resources required to build new, sustainable, energy infrastructure. As we have long argued, moving the global economy toward net zero emissions remains a core driver of the structural bull market in commodities demand, in which green metals – copper in particular – are critical.
The green transition will support a surge in copper demand. At the core of copper’s carbonomics is the need for the world to shift away from a production system based on the chemical energy of hydrocarbons (oil and gas), to one based on a range of sustainable sources – electromagnetic (solar), kinetic (wind) and geothermal. Copper has the necessary physical properties to transform and transmit these sources of energy to their useful final state, such as moving a vehicle or heating a home. Leveraging our equity analysts’ carbonomics analysis across EVs, wind, solar, and battery technology, we quantify this demand in a bottom-up model, estimating that by 2030, copper demand from the transition will grow nearly 600% to 5.4Mt in our base case and 900% to 8.7Mt in the case of hyper adoption of green technologies. We estimate that by-mid decade this growth in green demand alone will match, and then quickly surpass, the incremental demand China generated during the 2000s. Ripple effects into non-green channels mean the 2020s are expected to be the strongest phase of volume growth in global copper demand in history.
The copper market is unprepared for this critical role. Crucially, the copper market as it currently stands is not prepared for this demand environment. The market is already tight as pandemic stimulus (particularly in China) have supported a resurgence in demand, set against stagnant supply conditions. Moreover, a decade of poor returns and ESG concerns have curtailed investment in future supply growth, bringing the market the closest it’s ever been to peak supply. Indeed, we see the copper market sleepwalking to a classic case of the “Revenge of the old economy”, just as oil did during the 2000s commodity boom. The mining sector remains wary of a pivot towards growth after the price collapse in the mid-2010s severely punished any front-footed producers. Even as copper prices have rallied 80% over the last 12 months, there have been no material greenfield project approvals. Coronavirus has only compounded this dynamic, creating enough uncertainty to freeze companies’ investment decisions. This combination of surging demand and sticky supply has reinforced current deficit conditions and foreshadows large open-ended deficits from mid-decade. We now estimate a long-term supply gap of 8.2Mt by 2030, twice the size of the gap that triggered the bull market in copper in the early 2000s.
Sticky supply threatens to deplete copper stocks by mid-decade. Copper is a predominantly long-cycle commodity – it takes 2-3 years to extend an existing mine and as long as 8 years to establish a new greenfield project. This long lead time for the majority of copper supply, combined with the mining sector’s resistance towards new capex, leaves the copper market running out of runway to secure the necessary supply to meet demand in the second half of the decade. Perversely, this means copper prices must rise now to incentivise enough supply to solve prospective deficits, or risk chronic scarcity pricing in the second half of the decade. Copper is so integral to the green transition – a global effort underpinned by government support – that the supply requirements necessitate a spike in copper prices. History has seen many examples of commodities solving similar mid-term depletion risks with extreme nearer-dated price spikes, not least US natural gas and nickel in the early 2000s where projections for severe shortages were countered by significant increases in price, and followed by the required supply innovation. Copper, lacking any obvious productivity innovations on the horizon, needs higher prices to stimulate a record set of established short cycle (scrap, demand substitution) and long cycle (mine investment) responses.
Copper on a necessary path to $15,000. To capture the precise dynamics of this process we construct long-run models of scrap supply and substitution, as well as extend our balance out to 2030. The immediate conclusion is that current copper prices ($9,000/t) are too low to prevent a near-term risk of inventory depletion, while our current long-term copper ($8,200/t) is not high enough to incentivise enough greenfield projects to solve the long-term gap. If copper remains at $9,000/t through the next two years, then we estimate the resultant deficits would generate a depletion of market inventories by early 2023. Based on our scrap and demand modelling, we believe that the most probable path for copper price from here – that both avoids depletion risk and as well as a sharp surplus swing – is to trend into the mid-teens by mid-decade. We now project copper to average $9,675/t in 2021, $11,875/t in 2022, $12,000/t in 2023 before a material step-up to $14,000/t in 2024 and $15,000/t in 2025. In this context, we upgrade our 12-month target to $11,000/t.