AT A GLANCE
- A shortage has resulted from a slower copper production in recent decades, with rising demand.
- The pace of China’s growth was followed by copper prices, which rebounded during the second half 2020 and first half 2021.
Copper prices have risen 125% since March 2020’s lows. They have also been among the commodities that have reached record high prices ever since the pandemic. Copper’s rally has been attributed to many factors. Here’s a detailed look at each.
Slow growth in copper supplies
Copper mining output has grown much slower than other metals over the past 30 years, increasing just 123% in the last three decades. Aluminum production increased by 256%, while iron ore production increased by 257%. Copper mining output has been slowing down since 2013, at 1.7% per annum, which is less than half the 4.6% annual rate of supply growth.
A combination of factors led to a very slow increase in copper supply. Copper prices plunged 58% between 2010 and 2016, close to the metal’s production cost, which discourages new investment in mines or ore-processing plants. The copper content in copper ore has been steadily declining over the years. The total copper ore reserves have increased, but the cost to extract it has risen. A large portion of that increase is due to energy.
Energy Costs and Copper
Refining and mining metals requires a lot of energy. Copper prices show significant co-movement with West Texas Intermediate crude oil and other benchmark crude oil prices. One might have thought that this relationship was primarily on the input side. Higher/lower crude oil prices and higher natural gas prices made copper mining and refining more expensive. This assumption still holds today.
The sharp rise in oil prices and natural gas prices in 2021 could be driving copper demand. This may have a direct or indirect effect on copper use. This is especially true in Europe, Asia, which hosts 75% of the world’s population. Natural gas prices have risen to around 7-8x North American levels.
The Energy Transition
Copper and other metals like cobalt may be in high demand during the energy transition. The cost of solar energy has fallen by almost 70% over the past decade. However, the price of batteries has dropped by an equal amount. The costs of storage and solar energy have dropped by nearly 98% since 1990. It is possible to envision a future where abundant, clean, and carbon-free energy will be available, but it will require a lot more copper wiring.
Ground transportation is already seeing the benefits of this transition. The number of electric vehicles (EVs), sold worldwide increased 160% to 2.6 Million units in 2021. Moreover, EVs accounted only for 4% of global vehicle sales. If EVs continue to grow at such a rapid pace and increase their market share relative with combustion engine powered vehicles, it could indicate strong demand growth in copper and other metals. The cost of EVs is falling quickly, so they may be less expensive than cars powered by combustion engines in the second half 2020s.
China is the country with the highest EV demand. Last year, EV sales grew nearly 190%. China’s economy has been the largest source of copper demand over the past 20 years, even if it doesn’t include EV sales.
China purchases approximately 40%-50% of newly mined copper each year. While some raw copper is consumed domestically, most of it is re-exported to the component of intermediate and finished goods. The rate of growth in China’s manufacturing sector is often strongly correlated to both the current copper price and copper prices three to five years in advance. The Li Keqiang Index is a measure of electricity consumption, rail freight volumes, and bank loans that measures China’s manufacturing sector. It can be used to determine the rate of China’s growth. This measure is a stronger indicator of copper demand than China’s official GDP. It also includes other components like services and government spending, which are less relevant to raw material.
China’s growth rate rebounded strongly after it had fallen sharply in the early days of the pandemic. This rebound was closely followed by copper prices. The pace of China’s industrial development has slowed considerably since then. Copper prices fluctuated for several months as China’s industrial growth slowed. However, they began to rally slowly in recent months. The recent rise in copper prices could be due to the Russo–Ukrainian conflict. Russia produced 850,000 tonnes of copper in 2021. This is about 5% of the total world production.
China’s economy is still growing but faces several headwinds, including higher raw material prices, falling housing prices, slower exports, high levels of debt, sharply increased corporate bond yields, and a highly valuable currency. If China’s growth slows, it could increase the likelihood of copper prices falling in 2019 or 2023. The energy transition mentioned above may explain why copper prices keep rising despite China’s slower growth.
The Pandemic Shift In Consumer Demand
U.S. consumers spent 18% less on manufactured goods and only 6% on services between December 2019 and 2021. This was not a surprise. Consumers around the globe, as well as in the U.S., have shifted to buying more manufactured goods, including electronics and other products that contain significant copper content.
The majority of the world is now returning to a new way of living, and most consumers are shifting their spending away from manufactured goods to spend on experiences. This could limit copper demand and possibly hinder China’s export growth. This shift in consumer demand may offset some of the increased copper demand resulting from the energy transformation.