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ESG Focus: Copper Key To Energy Transition

ESG Focus | Jun 04 2021

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Copper key to climate change

Copper production is set to play a large role in the global transition to renewable energy over the next decade as governments ramp up production of solar and wind technology and electric vehicles to meet climate goals.

-As a key component to multiple green technologies, copper is essential to achieving climate change targets
-The 2020s are expected to be the strongest historical volume growth in copper demand
-Demand for copper could increase by as much as 900% by 2030 in the case of hyper adoption of green technologies

By Danielle Austin

A transition towards clean and renewable energy sources has become a key theme in global political and financial decisions in the last twelve months. Governments and policy makers, particularly the US, EU and China, have committed large investments into funding renewable energy sources and technologies as global energy consumption is predicted to rise by as much as 26% over the next 30 years.

Key to this transition is the continued production of copper. Without the use of copper, among other key metals, the substitution of renewables for oil will not happen. The metal is needed for a shift away from a production system based on oil and gas to a production system based on sustainable sources such as solar, wind and geothermal energies.

Copper is necessary in transforming and transmitting these sustainable energy sources to a useful final state.

Copper is a transition metal with a single valence election giving it ductility, electrical conductivity, thermal conductivity, and low reactivity. These properties make copper the most affordable option for a range of technologies key to sustainable energy, including cables, batteries, transistors and inverters.

Exponential growth rates predicted over the next decade

Currently, global annual supply of copper is around 25m tonnes, comprised of 21m tonnes of primary copper and 4m tonnes secondary, or scrap, copper. Forecasts show current levels of production and growth will not be sufficient to support a global economy shifting to renewable energy sources.

Goldman Sachs predicts that by 2030 copper demand could grow by as much as 900% in the case of strong adoption of green technologies, while more modest predictions still have demand up 600% in the next decade. Based on this, the 2020s are expected to be the strongest historical volume growth in copper demand, exceeding China-generated growth in the 2000s.

Copper prices bottomed out in 2016 after a growth period between 2001 and 2011 and remained relatively steady over the following five years, but following a period of growth in the last year, current prices are more than double that of 2016 lows and copper equities have risen over 200%.

While current global supply of copper is around 25m tonnes per year, Goldman Sachs’ modelling attributes only 3% of global copper in 2020 to ‘green’ copper usage. Further, since 2000 global copper growth supply has increased on average only 2.7% per year.

Comparatively, the broker predicts green copper could account for 9% of global copper demand by 2025, and as much as 16% of global copper demand by 2030, equating to an overall increase of as much as 14.5m tonnes by 2030.

Substitutions and scrap trends  

As copper production tightens due to increased demand, attention may turn to alternative metals. Aluminium is often considered an alternative for copper, being around a quarter of the price, but offers around only 60% of the electrical and thermal conductivity of copper.  While it is likely some aluminium will be implemented to maximise profits, it is unlikely to provide a sufficient substitution in many cases and is not expected to significantly impact copper demand.

Copper scrap may also be used to fill supply gaps. Secondary copper, or copper scrap, is sourced from recycling copper-containing products at the end of their lifecycle and retaining the useful metal. Some brokers cite China’s rapid-growth copper consumption in the 2000s as a likely source of secondary copper to assist in filling supply gaps over the next decade.

According to Goldman Sachs, however, China’s copper usage accelerated as copper usage in other countries decelerated. The overall affect is global copper usage was largely unaffected, and as such the broker expects secondary copper levels to remain steady.

Despite this, a secondary copper destocking cycle is expected driven by increased prices over the next decade. Goldman Sachs forecasts that for every US$1000/tonne price increase for copper the scrap trend will see an additional 4% growth in secondary copper supply.

Where you’ll see copper in next generation clean tech

Demand for renewable, green energies is set to be the primary driver of the tightening in the copper industry in coming years. The metal is set to play a huge role in the production and operation of next generation clean technology, with the electric vehicle, and solar and wind power sectors all claiming large portions of the global copper demand.

Copper is used in the production of cables, batteries and motors for electric vehicles, as well as necessary charging stations. Electric vehicles have more than five times the copper of an internal combustion engine vehicle. By 2030 electric vehicles are forecast to account for 40% of the green copper demand.

Goldman Sachs predicts over 31m electric vehicles will be sold each year by 2030, compared to the slightly more than 5m expected to be sold in 2021. According to the broker, this would equate to an annual demand increase in copper production of 2.4m tonnes, as well as an additional 153,000 tonnes to establish charging stations.

Longview Economics takes a slightly more bullish forecast, assuming copper production will need to increase by more than 12m tonnes by 2030 to meet global electric vehicle targets. These expectations have copper production growing 31-34% year-on-year over the next decade.

Copper will also play a large role in the transition to renewable energy sources, with 4-6 times more copper required per gigawatt by a renewable energy power plant than a conventional power plant. Given its higher conductivity per price compared to silver or gold, and its durability giving technology a 25-30-year lifespan, copper is crucial to the production of solar panels.

Goldman Sachs’ predicts the growth of solar demand rising at a rate of 15% per year over the next decade, with the Middle East expected to account for a large share of growth as the region transitions from oil to renewables. The broker predicts global demand of copper for solar energy technology to reach 1.6m tonnes by 2030, if not more.

Wind energy is predicted to account for as much as 20% of green copper demand, with the metal used for the cables and generators in turbines. Goldman Sachs’ expects wind-related copper demand to reach 1.3m tonnes per year by 2030, growing at a rate of 12.4% per year over the next decade. Wind and solar technologies combined will require total additional production of 2.5m tonnes copper by 2030.

Copper will clearly be key to meeting climate change goals in the next decade, but this increased demand will put pressure on an unprepared market.

This is the first in a series of two on the future of copper and copper mining. Part two will zoom in on changing dynamics for the miners globally.

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