Copper Rush: China’s Unprecedented Demand Boosted Copper Prices

In the early 2000s, China went through a major urbanisation process.

People were moving from the countryside into the cities and China went on a massive construction spree. China needed buildings to house people, they needed to build transport, infrastructure…and lots of copper for it.

Copper is versatile. It can conduct heat and electricity, so it’s in a lot of things we use today. It’s in pipes and wires in buildings, in cars, in appliances, etc.

China’s Unprecedented Demand Boosted Copper Prices

Prices hit close to US$9,000 a tonne in early 2008…and then collapsed later that year during the crisis. A few years later, the market had recovered, with prices hitting just over US$10,100 a tonne in 2011, an all-time record high.

Copper became so valuable that people stole it from homes, cell towers, or even the subway.

You see, copper can be recycled and reused. In fact, scrap copper makes up about a third of global copper supply at around 30 million tonnes.

But anyway, last week, copper prices beat that old 2011 all-time record high. According to the London Metal Exchange (LME), copper passed its previous record of US$10,190 per tonne from 2011 to reach US$10,761.

Three Ways to Invest in the Renewable Energy Boom

It’s been a pretty quick race to the top too. Only a year ago copper was trading at around half of that.

I mean, demand is rising.

First, there is the recovery from the virus and the global economy restarting. There are some inflation pressures. But, there’s also the renewable energy transition.

Copper is used in solar panels, wind turbines, batteries, and also electric vehicles. An electric vehicle can have an average of up to 83kg of copper per car, compared to the 20kg of copper internal combustion engine (ICE) vehicles have. That’s four times the amount of copper needed per EV!

And then, of course, you need copper for charging all those EVs, so it is quite key in building EV infrastructure and fast chargers.

Countries around the world are setting some ambitious emission targets. China is looking at net zero by 2060. The EU, UK, South Korea, and Japan among others are targeting 2050.

The US has pledged a US$2 trillion infrastructure plan that includes renewable energy.

Reaching decarbonisation goals means more electrification, and for that, we will need more copper.

Demand for copper could only grow from here…and so could the price.

In a report last month, Goldman called copper ‘the new oil’ and expects the metal to hit US$15,000 a tonne as early as 2025. They see the renewable energy transition creating a long-term supply gap of 8.2 million tonnes by 2030. As they said, ‘the highest on record’ and ‘twice the size of the gap that triggered the bull market in copper in the early 2000s.

As they continued:

Crucially, the copper market as it currently stands is not prepared for this demand environment. The market is already tight as pandemic stimulus (particularly in China) have supported a resurgence in demand, set against stagnant supply conditions. Moreover, a decade of poor returns and ESG concerns have curtailed investment in future supply growth, bringing the market the closest it’s ever been to peak supply.

Copper prices are already starting to reflect that increase in demand, giving an incentive to get more miners into the game.

But of course, it takes time to start or expand new mines.

Global Copper Demand Forecast

Citi forecasts global demand for copper will grow 6.5% this year to 24.75 million tonnes, and that supply will fall short by 521,000 tonnes. They expect both mine supply and scrap metal recycling to increase, but don’t expect they will cover the shortfall, as they need time to build up.

And then of course, any other factors hitting supply could affect prices.

Take Chile, for example.

Chile is by far the largest copper producer in the world, with 28% of world’s copper supply followed by Peru. In 2019 the two countries produced 40% of the global mined copper.

Chile is discussing passing a reform that would impose a 3% royalty on metal production including metals such as copper and lithium. The royalty would increase as copper prices rise.

If the reform goes through, mining companies would lose over 20% of their gross revenue to this royalty at today’s prices, according to Mining.com. It would affect miners’ bottom line but could also deter new miners.

Bottom line: the future for copper is looking quite bright.

Best,

Selva Freigedo Signature

Selva Freigedo,
For Money Morning

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Selva Freigedo is an analyst at Money Morning. She has a background in financial economics, but what makes Selva´s experiences different to many are the places she has lived and worked. Born in Argentina, she has also lived in Brazil, the US, Spain, and now Australia. She has seen up close many of the economic phenomena that worry Fat Tail Investment Research readers, like hyperinflation, bank bail-ins and governments burdened with so much debt it cannot possibly be repaid.

Every week, she goes through each article, research note and recommendation produced by our experts around the world to give you information on how to build and protect your wealth. Selva packages the week’s best ideas into one easy to read report: Port Phillip Insider Extra.


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