Copper discoveries, particularly in South America, have slowed in recent years and a new wave of political upheaval across the continent may create even more barriers to expansion. This news comes just as projections from the International Energy Agency show the production of minerals critical in green energy output will need to be up to six times what it is today to meet international climate goals.
While this would usually be the time that firms begin turning to the scrap market, given an expected copper deficit in the hundreds of thousands of tonnes this year, those supplies have dried up over the last decade and may not be enough to make a significant dent in perpetually rising futures prices.
Related ETFs: iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC), Global X Copper Miners ETF (COPX)
South American Political Upheaval Could Roll Back Mining Expansion
Following the rejection of Chile's ruling coalition in recent nationwide elections to choose 155 delegates who will write a new constitution for the nation, several left wing and independent parties, including the Chilean Communist Party and Frente Amplioare (Broad Front), won out and are now ascendant ahead of the country's general election in the fall.
Since Chile is the top copper-producing nation in the world, the results of these elections will undoubtedly carry significant and lasting implications for the mining industry and global copper supply.
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Chile's state-run Codelco, the world's largest copper producer, said in a letter to lawmakers this week that as much as 40% of its copper output is at risk if an environmental bill that limits mine operations near glaciers advances, according to a report in local daily El Mercurio, cited by Reuters.
Additionally, Bloomberg reports that constitutional reforms could make water a national good for public use, pointing to revised property rights and increased penalties for misuse. Water is a key element of the mining process and less access to it could slow planned expansions of output for many miners. The industry uses enough Chilean water annually to supply 75% of the country's need, according to McKinsey & Co.
Last week, Codelco raised its average copper price projection to $4.30 per lb for 2021, up more than 30% from a forecast of $3.30/lb that was made in January. By the end of 2021, the refined copper market is expected to be in a deficit of 145,000 tonnes. As Argus Media reports, the firm also believes strength in the copper market will persist even longer than previously expected, raising their projection for 2022's average price to $3.95/lb, up from previous estimations of $3.00/lb.
The South American political shift may not be an isolated incident as Chile's northern neighbor, and the second largest copper producing nation, Peru, is set for their presidential election in June. Candidate Pedro Castillo of the socialist Free Peru party is currently leading many of the most recent polls by a margin of 5%–10%. Last month, Free Peru became the largest party in the nation's unicameral congress.
A document recently tweeted out by the Free Peru party cited the Chilean government's newly proposed taxes on copper, stating, "Let us note that the Chilean Chamber of Deputies has already approved a new royalty whose rate reaches 75% if [copper] exceeds $4 a pound, as is the case today." While the full implications of such a law are not yet clear, it would likely create hesitation among foreign mining firms like Freeport-McMoRan Inc. and BHP Group in expanding their Peruvian operations.
As Juan Carlos Guajardo, head of the Chilean consulting firm Plusmining, has noted, "Some 42% of world copper mining production is under political uncertainty that could entail risks on future production."
Copper Demand For Green Energy Continues to Rise
These threats to output in key copper markets comes just as the International Energy Agency (IEA) has warned that "the energy sector's overall needs for critical minerals could increase by as much as six times by 2040, depending on how rapidly governments act to reduce emissions."
A shift from coal and gas power to wind and solar works in copper's favor because those systems require five times more copper than conventional ones. Green power-related demand, just 3% of copper usage in 2020, could hit 16% by 2030, the Goldman analysts estimate.
According to the International Renewable Energy Agency (IRENA) REmap scenario, in which efforts are made to limit global temperature rise to less than 2 degrees, the amount of copper needed to keep up with annual solar installations will be 1.86 million tonnes by 2050, nearly three times the current amount needed.
Combined on and offshore wind installations will need more than 1.30 million tonnes of copper, up 155% from current levels of demand for wind. Per OilPrice.com, the amount of copper required per wind turbine is a staggering 63,000 lbs.
As MRP highlighted last month, electric vehicles take around 83 kilograms of copper on average, while charging points need 10 kilograms of copper per unit. A team of Jeffries analysts, led by Christopher LaFemina, expects copper demand in EVs will rise to 1.7 megatons in 2030 from 170 kilotons in 2020.
Copper Scrap Supply Increasingly Insignificant
Per Mining.com, an analysis of significant copper discoveries between 1990 and 2020 shows that of the 229 deposits discovered in the period, only three were found in the past three years. Latin America was the top location for discoveries over the past ten years, but the 26.3 million tonnes of copper found on the continent is significantly lower than any other decade since 1990.
It seems increasingly likely that companies will need to start turning back toward the scrap market for supply.
In China, that shift is already underway. Copper scrap imports into the country surged by 81.7% YoY in the first four months of 2021. The Chinese government has explicitly noted it will work to curb ongoing "unreasonable" increases in prices, but their hands may ultimately be tied for several reasons—including its own stiff restrictions around the types of copper that they can import into the country, imposed late last year.
Additionally, as MRP highlighted last month, Citi analyst Max Layton notes that supplies of copper scrap will jump this year, but scrap is unlikely to come fast enough to meet robust demand, "Given logistical constraints and an 8-month lag between price strength and copper scrap coming to market for processing."
Last December, we noted that scrap is a diminished threat to prices these days with fewer large stockpiles left to materially shift the market. As Michael Lion, a trader at Hong Kong-based Everwell Resources, told Fastmarkets, "These days, there are no longer people holding big… inventories in the scrap industry—like [they would have done] 20 to 30 years ago when the industry was dominated by family businesses. So, the increase in prices does not do that much in [terms of] drawing out much more material."
With few new mines being developed, both Trafigura Group, the world's top copper trader, and Goldman Sachs say prices could hit $15,000/tonne, up from around $10,000/tonne, in the coming years.
Theme Alert
MRP added LONG Copper and Copper Miners to our list of themes on July 17, 2020. While we believe fundamentals underlying copper futures pricing remain very much intact, we will continue to monitor and report on the unfolding political situation in South America.
Front month futures for copper are slightly off their recent high of $4.76, closing at $4.53 on Monday. However, that price is still 88% higher than this time last year.
We've been tracking our Long Copper theme with the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) and the Global X Copper Miners ETF (COPX), which have returned +53% and +103%, respectively, over the life of the theme. Each of those have significantly outperformed the S&P 500's return of +30% over the same period.
Originally published May 25, 2021.
McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm's mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients' attention. MRP's research process reflects founder Joe McAlinden's 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.
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