Copper conundrum

In recent years, our long-term view of the copper market has foreseen falling production at existing mines coupled with a demand boost from electric vehicles (EVs), resulting in multimillion-ton-per-year shortfalls in supply and commensurately higher prices by the end of the next decade.

CRU Group’s “Copper Long Term Market Outlook,” which was published at the beginning of March, considers whether this narrative still holds true.

Copper price paradox

We continue to hold a positive long-term outlook on copper, predicated on a significant supply gap opening up in the 2020s. However, today’s low $6,000 per metric ton copper price contrasts with project economics that require a much higher price to incentivize new mine capacity. For the major mining companies, this presents a conundrum: invest now in an attempt to maximize future cash flows while risking the ire of short-term-focused shareholders or wait until the copper price recovers but potentially miss the most lucrative years of the next upturn.

Moving from surplus to deficit

Over the last year, we have incorporated many high-profile copper projects into our mine supply projections, including Quebrada Blanca Sulphides in Chile and Quellaveco in Peru. Board approvals for these multibillion- dollar investments undoubtedly were helped by the period of near or at $7,000 per metric ton copper prices during the second half of 2017 and first half of 2018.

More broadly, renewed C-suite confidence has firmed up the project pipeline to the extent that we now expect almost 1 million metric tons per year more mine supply by the early 2020s than at this time last year. Looming market deficits have given way to modest surpluses, and prices are expected to remain below $3 per pound ($6,614 per metric ton) in real terms over the next five years.

The shift in the medium-term view raises questions about the long-term outlook. Previously, falling production at existing mines coupled with a potential demand boost from EVs meant multimillion-ton-per-year shortfalls in supply and commensurately higher prices were expected by the end of the 2020s.

Project pipeline growth

Despite the stronger outlook for copper mine supply over the medium term, output from today’s operating mines is still expected to peak at approximately 22 million metric tons in 2021, reflecting a combination of declining ore grades and reserves exhaustion. Even accounting for approved projects only adds another three years of production before growth rates turn negative.

Some are now expressing concern that the lower copper price during the second half of 2018 and at the start of this year means a dearth of projects will start up in 2024 or 2025. However, looking slightly further ahead, a significant pipeline of projects remains that could begin to fill a gap in supply. CRU rates these projects as either “probable” (feasibility study and environmental permitting underway) or “possible” (prefeasibility study underway or reasonable economics).

Indeed, the project pipeline in the decade ahead represents almost 12 million metric tons annually of contained copper, which is 20 percent more than we forecasted a year ago. It is more reminiscent of the outlook at the beginning of 2014 and 2015 than in 2016 or 2017, when mining companies purged future investments in response to the sharp decline in the copper price and operating margins. The 400,000 metric ton per year expansion for Collahuasi in northern Chile, which was presented by Anglo American in early 2018, is one example of projects that have been added to our list in the last year.

Rationalizing the electric vehicle story

Looking back to 2017 in particular, some industry participants no doubt (though not us) saw potential growth in EVs as justification for an immediately higher copper price. Today, the market consensus appears more accepting that EVs are not meaningfully going to affect global copper demand until the mid-2020s, when global consumption should reach 1 million metric tons.

Nonetheless, the story remains compelling. Full battery electric vehicles (BEVs) consume four times more copper than internal combustion engine (ICE) vehicles, and the associated infrastructure (chargers and grid storage) also is copper intensive. Moreover, once an inflection point in EV sales is reached, subsequent growth rates are likely to be spectacular, taking related copper demand to 2.8 million metric tons in 2030 and to more than 5 million metric tons in 2035.

China in particular, where upwards of 50 percent of growth in EV-related copper demand is expected to occur over the next 15 to 20 years, is critical to the demand outlook. Indeed, without it we estimate that Chinese refined copper consumption would fall by around 25 percent as investment in the electricity grid, real estate and other infrastructure begins to normalize.

Addressing Scrap uncertainties

Last year China introduced restrictions on the import of low-grade copper scrap (Category 7) as well as placing a 25 percent tariff on secondary material imported from the United States. However, the resulting disruption to the market was less than expected as material was processed elsewhere, e.g., Malaysia, and then redirected into China. Nonetheless, a further tightening of import restrictions this year and the prospect of a full ban starting in 2021, countered by the possibility that higher grade scrap (Category 6) might be redesignated as a secondary resource, are creating uncertainty.

Unpredictable government policy aside, the longer term debate about scrap concerns the extent to which an apparently large and growing pool in China will be returned to the market either in the smelting and refining process or used directly by semifabricators.

Existing domestic scrap collection infrastructure is rudimentary, with relatively undeveloped supply chains and little in the way of automation: The top three scrap recycling companies in China account for less than 20 percent of the total market. This situation could, of course, change quickly, and our modeling suggests that by 2035 scrap will meet around one-third of China’s total copper demand.

Stacking up project costs

Project economics are the other consideration. Dollar input costs and byproduct prices, along with the influence of individual country exchange rates, are keys to determining expected operating costs. However, cash costs net of byproduct credits only tell part of the story. For the marginal project required to meet future demand in 2030, this measure is well-below today’s copper price, and that is before sustaining capital, working capital and central overhead allocation are factored in.

However, development capital costs really make a difference, accounting for around 40 percent of the full economic costs of production on average. Moreover, capital costs measured on a unit-per-metric-ton-of-copper basis remain stubbornly high. Actual plant and equipment costs had less upward pressure on them than during the previous cycle, but harder to measure project costs, such as environmental permitting, health and safety and the social license to operate, continue to escalate.

The author has 20 years of experience in the metals and mining industry. He covers global copper demand and markets for CRU Group, London. More information on CRU is available at www.crugroup.com.