ESG Focus: Green Copper Demand Ready To Roar

ESG Focus | Jun 07 2021

This story features RIO TINTO LIMITED. For more info SHARE ANALYSIS: RIO

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: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Copper key to climate change

The clock is ticking for the copper industry, with experts saying significant investment needs to be made now to support the timely lifecycle of copper production and support a global economic shift to sustainable energy and technologies.

-The current copper market is unprepared for demand surges required to support a move to renewable technologies
-Investment in long-cycle copper projects is necessary now to maintain required production rates through the next decade
-Copper price forecast to trend to mid-teen growth by 2025

By Danielle Austin

With the copper market positioned to be crucial for the development of green energy over the next decade, industry experts are urging immediate investment in the sector to guarantee sustainable production.

The copper market currently sits the closest it ever has to peak supply following a decade of poor returns and ESG concerns that have stalled investment in future project growth. Despite increases in copper pricing over the last twelve months, there has been little progress in future project approvals.

Due to a combination of surging demand and low supply, Goldman Sachs predicts large copper deficits from the mid-2020s, estimating a supply gap of -8.2m tonnes by 2030. This represents a gap twice the size the gap that triggered the early 2000s copper bull market.

Issues in a long-term copper stock cycle

Copper is largely a long-cycle commodity, taking as long as eight years to establish a new greenfield project and between two and four years to expand on existing brownfield projects.

Based on this long lead-time, the copper market faces a real possibility of being unable to meet demand through the second half of the decade, unless projects are implemented now to support demand. Based on historical supply shortages, Goldman Sachs suggests copper prices need to increase now to stimulate long cycle responses and ensure maintained copper production throughout the decade.

The copper market is already facing a material deficit over the coming 24 months, with Goldman predicting a -242,000-tonne global copper deficit in 2021 and a -201,000-tonne deficit in 2022. The broker predicts such deficits will lead to a market exchange stock to consumption ratio record low by the second half of 2022.

According to the broker, following a five-year period of low growth in the market, copper supply could expect a brief growth phase between 2022 and 2023, equating to a 309,000-tonne surplus in global copper supplies in 2023. This will lead into peak supply in 2024, with a surplus of 107,000-tonnes, preceding increasing deficits, with the broker expecting as much as a -325,000-tonne deficit by 2025.

The real cost of copper pricing

According to Goldman Sachs' estimates, if copper prices remain at the current US$9,000 per tonne price through the next two years, market inventories will be depleted by 2023. The broker suggests the most probable occurrence to avoid depletion risk and sharp surplus increase is a consistent trend to US$15,000 per tonne by mid-decade.

Under this projection, the broker has copper averaging US$9,675/t in 2021, US$11,875/t in 2022, US$12,000/t in 2023, and a marked step up to US$14,000/t in 2024 and US$15,000/t in 2025.

Investment needed to safeguard copper demand

Mining sector analysts suggest a pivot to growth investment is needed now to mitigate a long-term supply gap over the next decade. An imminent investment in the copper industry is also crucial to avoid a constraint on the transition to renewable energy. Goldman Sachs feels the copper price is key to generating adjustments.

Copper companies have historically increased their stock supplies to meet high demand by lowering the cut-off grade of mineable copper. This can offer a fast solution to insufficient supply demand, where producers re-classify rock previously deemed waste to be mineable. Goehring & Rozencwajg estimated that between 2001 and 2014, around 80% of the copper industry’s new reserves came from lowering cut-off grades rather than new copper discoveries.

Goehring & Rozencwajg also point out this practice is not sustainable and predict the market is approaching the limits of cut-off grades. It is unlikely cut-off grades can be reduced much further to placate supply demand in the coming decade, as the cost and complexity to produce the metal will grow exponentially as the grade is further lowered. Reducing cut-off grades in coming years is therefore not a replacement for long-term investment in the industry.

What does the future of the copper industry look like?

Copper prices rose 17% during the first quarter of 2021, now sitting at prices 50% above pre-covid prices. Research by sector analysts suggests this is only the beginning of copper price rises which will accelerate over the next decade.

Despite new projects set to come online in coming years, including the Canadian/Chinese-owned Kamoa/Kakula project in the Democratic Republic of Congo and Rio Tinto's ((RIO)) Oyu Tolgoi block-cave in Mongolia, achieving sufficient production from greenfield projects to offset the depletion of existing projects seems unlikely.

It is plausible that demand increase will drive innovation forwards for copper and copper-alternative usage, potentially reducing the need for copper. Aluminium will likely take some market share, while other competitors such as carbon nanotubes or graphene that can compete with copper’s conductivity will likely see commercialisation.

It is estimated there are 3,500m tonnes in copper resources available globally. This equates to around 140 years of supply at the current rate of copper consumption, or around 84 years of supply based on forecasts for 2030.

Discoveries of new copper reserves have fallen dramatically in the last decade. That decade has seen new discoveries averaging only 8m tonnes of resource per year, an -80% decrease on the 50m tonnes per year being discovered between 1990 and 2010, according to S&P Global Market Intelligence estimates.

Further, budgets for copper exploration have increased to $2.5bn annually compared to around $80m annually prior to 2010.

It would appear the industry’s fall backs of lowered cut-off grades or scrap trends are unlikely to make a significant difference to the coming gaps in supply that are set to push copper prices to new highs over the 2020s.

****

This is the concluding chapter in a two part series on the role of copper in the global transition to more sustainable energy usage. The first part can be accessed here: 

https://www.fnarena.com/index.php/2021/06/04/esg-focus-copper-key-to-energy-transition/

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: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

RIO

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED