A new 122-page report by S&P Global titled "The Future of Copper: Will the looming supply gap short-circuit the energy transition?" makes for fascinating reading.
The world economy’s goal of getting to net-zero emissions by 2050 is widely called the energy transition. It will require massive investments in the production and distribution of renewable energy, electric vehicles and their charging points and other new technologies. All the new infrastructure that will need to be built will require massive amounts of minerals, especially copper. The question is, can the metals and mining industry meet this generational challenge? Will policymakers enable investment and bring about an environment that supports increased production of the critical materials needed to power the decarbonization revolution?
S&P Global has modelled copper demand out to 2050. The capital markets company sees copper demand peaking in the mid-2030s, slowing in the 2040s and increasing again into 2050. Copper demand is set to double thanks to economic and population growth.
The report warns that in order for 2050 objectives to be met, copper production needs to be significantly increased in the near and medium terms, but this is going to be difficult. The demand increase caused by the energy transition is going to be driven by the deployment of electric vehicles on a global basis and the upgrade and buildout of power infrastructure to support electrification and an increase in renewable generation capacity, including wind, solar and energy storage.
Copper supply is starting to become challenged with global refined copper demand set to nearly double from just over 25 million metric tons in 2021 to nearly 49 million metric tons in 2035 according to S&P Global. Energy transition-related markets will drive most of this surge by 2035, accounting for nearly 21 million metric tons.
S&P tests copper demand against two supply scenarios. The “High Ambition” scenario reflects the fact the world needs greater ambition to get to the 2050 goals. The “Rocky Road” scenario highlights the challenges faced in production, from excavating rock through to the finished copper product.
High ambition scenario
In the high ambition scenario, refined copper production is seen increasing from 24.5 million metric tons in 2021 to over 47 million metric tons in 2035. This will cause continuing shortfalls between copper supply and demand starting in 2025 and lasting through to the end of the 2030s, with a deficit of more than 1.5 million metric tons forecasted in 2035. The scenario, which is optimistic, strongly relies on increases in both mine and processing capacity utilization along with levels of recycling. So even in the optimistic scenario, S&P demonstrates there will not be enough supply to meet the emissions goal.
Rocky road scenario
This scenario is perhaps the more realistic one, which considers the many obstacles and challenges copper producers face. It models capacity utilization and recycling rates staying flat from current levels, with continuing operating and investment challenges restraining output. Under this scenario, the annual copper deficit reaches nearly 10 million metric tons in 2035. This is a huge amount that could only be balanced through unprecedented shocks to both supply and demand. This scenario forecasts lasting deficits from 2024 onward.
Concluding thoughts
Neither scenario assumes expansions. The introduction of new mines will speed up regulatory, permitting and legal challenges and, combined with long lead times for new mines, dampen the speed of supply increases. Policymakers will need to make life easier for mining if the world is going to narrow the coming copper deficit.
The copper deficit will slow down the energy transition and endanger the net-zero emissions goal. The size of the copper deficits in both scenarios would put a lot of upward pressure on copper prices.
S&P Global notes that geopolitical tensions will add additional challenges to the copper trade. China is the dominant global supplier of refined copper, but the U.S. imports over half of its needs and Russia’s war with Ukraine adds friction to the global copper markets. The environmental, social and governance objectives and policies are adding compliance, legal and operational costs to the mining sector, while at the same time pushing investments to clean sectors that require more copper. Then, as the copper deficit grows, the commodity will start to become a more strategic and national security priority, such as oil has been for the past 100 years, which will likely encourage resource nationalism for the metal.
Clearly, technology and policy innovation will both be extremely important to reduce the forecasted copper deficit and to drive toward net-zero success. Technological innovation will be needed to drive greater mining and processing efficiencies, as well as for reducing copper demand with alternative materials and better designs. Boosting recycling levels will also be important. No wonder Glencore PLC (LSE:GLEN, Financial) has set up a recycling division and is placing great emphasis on it.
In terms of government policy, actions that speed up development times and reduce delays will be helpful. An understanding of the interdependencies between the energy transition, copper supply and demand as well as requirements for other key materials needed for electrification is also going to be very important.
S&P’s report highlights the risk of net-zero emissions by 2050 being missed as well as copper demand far outstripping supply. Copper will become as important as oil was in the last century. Copper miners will be essential partners for any successful energy transition and conditions are likely to be in their favor to realize greater prices and volumes.
The S&P report was funded by several mining companies, but the editorial was independent and S&P Global is a respected name in world of commodities. The miners included Anglo American PLC (LSE:AAL, Financial); Antofagasta PLC (LSE:ANTO, Financial); BHP Ltd. (LSE:BHP); Glencore PLC (LSE:GLEN, Financial); Rio Tinto PLC (LSE:RIO, Financial), Taseko Mines Ltd. (LSE:TKO, Financial) and others. They are all worth looking at for the long term.
