Copper, which was dubbed as “The next Oil” by Goldman Sachs due to necessity in modern infrastructure and technology, highlights a unique market dependency; there exist one big difference between oil and copper: we can divest from oil, but we cannot divest from copper.
There are many factors that lead and will continue to lead to the increase in price of Copper including increasing supply due to technology, carbon neutrality, and diminishing Ore quality and supply.
Copper is mined in various locations around the world. The largest copper-producing countries include Chile, Peru, China, the United States, Australia, the Democratic Republic of Congo, Zambia, and Russia. In 2022, 22MT of copper was mined worldwide, with the largest output coming from Chile.
The 3 main methods of mining Copper are porphyry copper mining, stratiform/sediment-hosted (SEDEX) copper mining, and volcanogenic massive sulfide (VMS) copper mining.
Deep within the Earth hot fluids rise and deposit minerals in large, underground bodies called rock plutons. Rock plutons contain porphyry copper deposits, which are extracted through open-pit and underground mining.
Another method of mining Copper is SEDEX mining. SEDEX copper deposits form as Copper rich fluids are deposited into sedimentary rock over time. SEDEX mining is conducted similarly to porphyry mining, through excavation, open-pit mining, and blasting. Once the ore is extracted, it is then crushed to extract the Copper.
As hot metals containing Copper are expelled through volcanic activities, VMS copper deposits are formed in surrounding areas. These deposits often located near volcanic vents are mined, then the "copper is separated from the other metals within the ore.
Copper has many uses, with the main use being in wiring. Unlike aluminum wire, Copper is non thermally expansive, doesn’t decrease functionality with corrosiveness, and has higher conductivity.
There are many upcoming projects over the next decades that will greatly increase the demand for copper, well above the current demand for the metal. Many factors such as power grids, carbon emissions, electric vehicles and AI will greatly increase the need for copper to levels well above production levels.
The largest driver for future demand of Copper is the rapidly aging power grids across the US. At its current capacity the US power grid is unequipped for its future needs. The U.S. Department of Energy estimates that the U.S. will need to expand the transmission system by 60% by 2030 [3]. Furthermore, as climate change worsens, the US power grid becomes more and more unprepared for the challenges that the power grid will have to face. In 2021, due to an extreme and unprecedented ice storm, Texas suffered a major power grid failure that lasted over 2 weeks and caused the deaths of between 246 and 702 people, and $195 billion dollar in damage [4]. As atmospheric changes continue to worsen, frequency of major storms will increase, risking more incidents such as this.
While climate change worsens zero emissions goals are an even bigger driver of upgrading the US power grid. Currently, the Paris Agreement has a net zero carbon goal by the year 2050. In order to reach this goal there must be a large investment into green energy, and electrifying previously gas powered functions such as heating. In order to match the needs of green energy, the US power grid will need to double in size. This will require approximately 427 MT of copper to upgrade the power grid to meet current demand via green energy [13].
Source 12
Currently, only 22MT of copper is mined per year, making the vast demand to modernize the grid a significant driver of future price increases in the near future.
Another major driver of copper demands in the future will be electric vehicles.
While the average Gas powered vehicles requires 23kg of Copper to produce, a plug in hybrid electric vehicles (PHEV) requires 40kg of copper to produce, and a battery electric vehicle (BEV) requires 83kg of copper to produce [1]. Currently the YoY production of electric vehicles increased by 22%, and as electric vehicles decrease in price and become more common, the demand for copper by EV’s will greatly increase. Furthermore the energy requirements for charging electric vehicles in a net zero carbon scenario currently represents 22.6% current electricity usage, further requiring expansion of the PowerGrid [7].
One of the largest future consumers of electricity will be AI companies. In 2022, AI was responsible for 4% of the US electricity use [2], and with the industry having a CAGR of 28.46% [14] and the complexity of AI rapidly growing, the energy requirements of AI are only going to increase.
Due to the Bitcoin, AI, and Electric Vehicle power use growing, power grids will have to be further expanded to meet future energy requirements. Bitcoin's electricity consumption increased from 0.2% to 0.9% of global demand [5], and with the bitcoin mining industry having a CAGR of 26.7%, this will greatly increase [6].
Furthermore, within the US a large amount of cryptocurrency mines are located within Texas. This will further increase the previous need of immediate modernization of the Texas power grid.
One of the biggest threats to the supply of Copper is overall purity of Copper Ore mined. From the 19th Century to the late 20th Century the overall Ore Grade increased, however at the turn of the 2000’s the Ore Grade began to decline.
A recent report by the McKinsey & Company mining team stated
“The trend of declining copper head grades is well established and unlikely to be reversed. Similarly, oxide ore bodies, which do not require concentrators and can be processed through less capital-intensive routes, are being exhausted” [10]
Source 11
Currently, Copper Ore has a Purity of Approximately, however the Grade is expected to continue to lower over time.
Source 11
While the mining of Copper Ore increases in volume, overall copper mining output is expected to rapidly decrease due to the fall in Ore Quality. A similarity can be drawn between oil and copper, as we know we have finite Oil, we also have finite Copper. Furthermore, when we look into the ore types along with declining quality, we’ll see that copper is doomed to further scarcity.
Via ‘Future copper resources’ by Donald A. Singer
As we can see based on previous charts most Copper is mined through Porphyry mining. Porphyry copper deposits typically have 0.2-1% copper content, far lower than other deposits which can have upward of 5% [8]. As Ore quality decreases Porphyry mining becomes far more costly than other forms of mining due to its already lower ore grade, and as a result of this supply of copper at current price levels will decrease [9].
Looking at the Commitment of Traders (COT) index we can see that over the past month Commercial Hedgers have been building up a short position on Copper while speculators build a long position.
Commercial Hedgers are typically seen as the “smart money” as they have a significantly better understanding of the fundamentals of a commodity. Commercial Hedgers are far more often involved in the merchandising, production, and processing of copper, common sense would indicate that Commercial Hedgers are right due to there in depth knowledge of the industry. The Commercial Hedgers Position Indicates that while Copper may increase in price over the long-term, in the short-term copper prices will sharply decrease, and while common sense would indicate aligning with “Smart Money”, Commercial Hedgers are wrong and will have to unwind there position in the short term.
Looking at the PMI Index for Copper we can see that purchases for copper in the short-term are poised to rise over the next 7 months, with key demand coming from the US and China.
Furthermore the report outlined unemployment in the Global Copper sector decreasing in the short-term.
While this makes a case for commercial hedgers being wrong, if we further look into the historic patterns of commercial hedgers we can see that Commercial Hedgers building a short position can be used as a leading indicator of Copper prices increasing.
Based on both historical COT and the Purchasing Manufacturers Index we can see that Copper is poised to continue to make moderate gains in the short term based on the patterns of commercial hedging.
Via earthI
The Global Inactive Capacity Index for copper has shown that recently, global inactivity has greatly increased due to the struggles faced by mines while mining copper.
Via earthI
This index is derived using earthI satellite image photo from copper mines across the world, such as the one showed above. The smoke output from the smelting process is tracked to determine the inactivity from the mines.
Due to a multitude of factors including rapidly increasing demand, dwindling supply, and increasing speculation, Copper is likely to increase in price in both the short and long-term.
Sources
10- https://www.mckinsey.com/industries/metals-and-mining/our-insights/bridging-the-copper-supply-gap
11- TY - JOURAU - Northey, StephenAU - Mohr, SteveAU - Mudd, GavinAU - Weng, ZhehanAU - Giurco, DamienPY - 2013/01/01SP -T1 - Modelling Future Copper Ore Grade Decline Based on a Detailed Assessment of Copper Resources and MiningVL - 83DO - 10.1016/j.resconrec.2013.10.005JO - Resources, Conservation and RecyclingER –
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