Two huge pieces of news in recent weeks have rocked the copper market. As a result, a massive long-term opportunity for copper investing is now crystallizing over the short term.
As many mining investors already know, on
November 28th, due to a court ruling, the huge Cobre Panama Mine (in Panama) has been shut down indefinitely. This has removed 370,000 tonnes (per year) of copper production from the market – perhaps permanently.
Roughly a week later, mining giant Anglo American Plc
reduced its copper guidance for 2024 by ~200,000 tonnes. That’s
nearly 600,000 tonnes of copper production erased for 2024.
Supply problem #1: analysts were forecasting (on average) a copper surplus of just over 300,000 tonnes for 2024. That now appears likely to almost reverse, to a supply
deficit of close to 300,000 tonnes.
Supply problem #2: global copper inventories are already sitting near multi-year lows.
Supply problem #3: copper
demand is expected to
double between now and 2035.
Altogether, these factors represent nothing less than
a mine supply crisis for the copper market. The result? Analysts have become very bullish on copper, and are now projecting
a 75% rise in the price of copper by 2025.
That’s a current snapshot of the copper market. Delve deeper, and the supply/demand picture for copper looks even more robust.
Enormous supply challenges for the copper market
News out of China is that the government is looking to
curb copper smelting, both to address what was expected to be short-term excess capacity in copper production, and to reduce CO2 emissions in China.
Meanwhile, future demand for copper is projected to explode. A July 2022 report from S&P Global frames the supply/demand challenges in the copper market.
Demand doubling. “Record” copper deficits.
With copper inventories
already tracking near multi-year lows and copper mine supply looking more uncertain, what does that suggest for future copper prices? Up and up and up.
These supply/demand issues can only be addressed by dramatically ramping up mine supply. This immediately leads us to another supply issue in the copper market.
In its
2023 Commodity Outlook (published in December 2022), Goldman Sachs warned of
“an underinvested supercycle”.
Lack of financing from the banking industry (including Goldman Sachs itself) and lack of investor support has left the mining industry in general and the copper sector, in particular, woefully underinvested.
At precisely the time that the mining industry needs to ramp up copper output at an unprecedented rate, the copper mining industry is coping with chronic underinvestment.
S&P Global puts this severe underinvestment
into context for investors.
Supply challenges
Mothersole said copper supply will be up against an unprecedented surge in consumption through 2050.
"If we are to meet energy transition targets, the amount of copper that's going to be used over the next 28 years is going to exceed all of the cumulative copper consumption that the world has seen since 1900," he said.
That’s ~120 years of previous copper demand condensed into less than 30 years. Obviously, the supply of copper will have to be ramped up dramatically to meet that demand.
Some excess supply capacity exists among multinational mining companies – and can be brought online if (when) fueled by higher prices. However, the majority of this huge supply gap can only be met through
taking new mining projects into production.
Copper demand fueled by several mega-trends
In 2022, China accounted for an incredible
55% of global copper consumption. To put this into perspective, that’s more than twice as much demand for copper as North America, South America, and Europe (minus Russia)
combined.
When copper inventories fall, it means that China is restocking its economy with copper. And when copper inventories (temporarily) rise, it means China is internally de-stocking.
Effectively, this means that investors can ignore the short-term noise in the copper market and focus on the longer-term trends.
The previously cited 2022 report from S&P Global is predicting a doubling of copper demand in a little over a decade. For what is already one of the world’s largest metals markets, that’s an extraordinary projection. But it’s based on several mega-trends.
- The transition from conventional automobiles to EVs
- Vast growth in renewable power sources (and “net-zero” carbon targets)
- China’s Belt and Road Initiative (BRI)
Conventional automobiles (ICEs) require 18 to 49 pounds of copper per vehicle. An EV contains (on average)
183 pounds of copper. A fully-electric bus requires
814 pounds of copper.
Even if recessionary conditions cause automobile sales to slip, with EVs requiring as much as 10X as much copper as an ICE, automobile-based copper demand is still going to go up, not down.
Solar and wind power require
two to five times as much copper per megawatt of capacity versus fossil fuel power sources. The U.S. and other Western nations have committed themselves to this extra copper demand as they replace much of their fossil-fuel generated power with these renewable sources.
Along with that, the U.S. government has finally acknowledged the need to overhaul the country’s aging electrical grid. Already badly in need of upgrading, the electrical grid will face enormous additional strain from both EV-based electrical demand and the volatility of renewable energy sources.
Lots more copper required here, or the lights will simply start going out --- across the United States.
Then there is the Belt and Road Initiative, what is likely to become the largest global infrastructure and industrial initiative in the history of humanity. More than 140 nations have signed on to participate in the BRI.
More than $1 trillion has already been spent on BRI-related projects by China alone.
What do all three of these mega-trends have in common? They are all
independent of the economic cycle, meaning they are largely unaffected by recessionary conditions.
Yes, many sober analysts see
a U.S. recession looming. No, this should not have any major impact on the extremely robust demand profile for copper.
Once-in-a-lifetime opportunity in mining stocks
The existing supply chain for copper is severely “underinvested”. Yet it can easily require a decade (or longer) to go from initial copper exploration to commissioning a new mine.
This means that copper exploration companies that are advancing copper projects today will not only continue to enjoy bull market conditions as these projects mature, but supply constraints (and huge demand) will likely further strengthen bull market sentiment.
That will help to reassure investors. What will also encourage investors looking to stake out positions in copper today are current valuations, virtually across the board in the mining industry.
Despite the extremely robust supply/demand parameters that exist across most metals markets, valuations for mining stocks are near historic lows – especially the junior mining stocks.
Commodity prices (as defined by the GSCI Commodity Index)
haven’t been this low versus the S&P 500 in more than 50 years.
Investors make money by buying low and selling high. Today, investors have the potential to buy very low and sell very high.
A great opportunity for commodity investing, in general. A fantastic opportunity to invest in copper.
