Is there enough copper to do the job?

Copper dynamics

Copper’s unique chemical structure and resulting properties make the metal vital to electrification and places it at the forefront of demand to facilitate the energy transition. Copper’s ductility allows for simple sheet forming and wire pulling, its electrical and thermal conductivity only competes with far more expensive metals such as gold and silver, and its natural protective coating that forms during oxidization results in low reactivity and corrosion. Due to these properties, alongside its cost efficiency, copper is the preferred conductor in key renewable energy technologies and infrastructure. 

Given this wide range of use in key energy transition technology and infrastructure, it is estimated that to meet the Paris Agreement’s 2°C goal, energy transition associated copper demand will increase ~6x by 2040 to over 20 Million tonnes (‘Mt’) of copper per year, in turn representing close to half of all global copper demand.

To put the long-term copper demand into perspective, just by replacing the world’s combustion engine cars with EVs by 2050, as proposed in the Green New Deal, every ton of the world’s currently known copper reserves would be utilized.

Figure 1:  Annual copper demand

Source: Wood Mackenzie

Looking to the supply side of the equation, the net production forecast, from both existing mines plus the currently identified prospective development projects, is likely to reduce in the long term. This results from a number of factors including, amongst other things, long-term grade depletion and a significant underinvestment in exploration and development.

Over time, the high-quality, larger-scale, higher-grade deposits have been depleted. This trend is expected to continue in the future with lower-quality, smaller, low-grade, highly-complex and deeper orebodies requiring extraction to meet the aforementioned demand. To do this responsibly requires deep technical expertise and further innovation which the industry hasn’t seen for years. Inevitably, this will come at a higher cost and accordingly result in higher prices. 

To compound the issue of grade depletion, as a result of low to moderate copper prices between 2013 and 2020, the copper market saw an underinvestment in exploration and development, vital to replacing reserve depletion and meeting future demand.  

Figure 2:  Copper grade depletion over time

Source: Wood Mackenzie

As presented in Figure 3, exploration budgets decreased 66% from US$4.7 billion per annum in 2012 to lows of US$1.6 billion per annum in 2016. Global annual exploration budgets between 2015 and 2020 were less than half of that seen in 2012.

Figure 3:  Exploration Budget Trends

Source: S&P Global Market Intelligence

It is clear that, where we stand today, the copper market does not currently have a sufficient development pipeline to facilitate the Paris Agreement’s 2°C goal and due to the lagged nature of the industry any discoveries made now would take a minimum of 7-10 years to develop.

To maintain continuous reserve replacement, it is estimated that a major copper discovery would be required every 6 months, significantly more frequent than the current pace with only one major discovery made since 2015. Even as copper prices have rallied 80% over the last 12 months, there have been no material greenfield project approvals, highlighting the need for immediate investment into developing the extensive copper mining project pipeline required to supply the energy transition.

This culmination of massive forecast demand growth to supply the energy transition, coupled with historic underinvestment in exploration and development, has resulted in the structural imbalance we see now between the pipeline of projects available to increase supply and the accelerating demand growth.

Figure 4:  Global copper long-term outlook

Source: Wood Mackenzie

Summary

Considering all the discussed dynamics, it is clear that investment into copper exploration, development, and mining is vital to meet global climate change targets and creating a more sustainable and greener future. It is expected that half a trillion US dollars of investment is required by 2035 to keep us on track with the Paris 2°C target, i.e. double the US$280 billion invested into the space since 2005. 

Without investment materially above historic levels or technological advancements unseen today, copper supply could be a limiting factor to achieving global climate control goals. In the meantime, incentive pricing levels are expected to be maintained over the foreseeable future to provide the necessary support for this energy transition. 

Additional data sources: Wood Mackenzie, Goldman Sachs Global Investment Research, S&P Market Intelligence, IEA, European Commission, IMF, McKinsey & Co.
Note:
1. As of April 2021