Interesting Read . - Slower copper production in recent years has led to a shortage with demand rising.
- Copper prices followed China’s pace of growth, which rebounded in the second half of 2020 and the first half of 2021.
Copper prices have risen 125% from their March 2020 lows and have been among the commodities that have reached record high prices since the pandemic began. Several factors have contributed to copper’s rally. Following is a look at each, in detail.
Slow Growth in Copper Supplies
Over the past three decades mining output for copper grew far more slowly than for most other metals, rising just 123%. Over the same period, aluminum production grew by 256% and iron ore production rose by 257%. Since 2013 copper mining output has grown slowly, at just 1.7% per year, less than half aluminum’s 4.6% annual pace of supply growth.
The exceptionally slow growth in copper supplies resulted from a combination of factors. First, copper prices fell 58% between the beginning of 2010 and the beginning of 2016, falling close to the metal’s cost of production and thereby discouraging new investments in mines and ore-processing facilities. Secondly, the copper content of copper ore has declined steadily over time. While total discovered reserves of copper have continued to climb, the cost of extracting copper has been on the rise and a large part of that cost is energy.
Energy Costs and Copper
Mining and refining metals is an energy-intensive business. As such, copper prices tend to show a great deal of co-movement with the price of West Texas Intermediate crude oil, as well as other crude oil benchmarks. In the past, one might have assumed that this relationship was mostly on the input side: higher/lower crude oil and natural gas prices made mining and refining copper more/less expensive. That assumption is still valid today.
However, the sharp rise in oil and natural gas prices in 2021 may be raising demand for copper by fueling interest in alternative technologies such as wind, solar, batteries and electric vehicles, all of which imply the use of copper either directly or indirectly. This may be especially true in Europe and Asia, home to 75% of the world’s population, where natural gas prices have risen to 7-8x North American levels.