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A great copper squeeze is coming for the global economy

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(Bloomberg) — The price of copper — used in everything from computer chips and toasters to energy systems and air conditioners — has fallen nearly a third since March. Investors are selling out of fear that a global recession will hamper demand for a metal synonymous with growth and expansion.

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You wouldn’t know it if you looked at the market today, but some of the largest miners and metal traders are warning that in just a few years there will be a massive shortage for the world’s most critical metal – one that could brake itself. global growth, boost inflation by increasing production costs and throw global climate targets off course. The recent downturn and resulting underinvestment threatens to make matters worse.

“We’re looking back at 2022 and thinking ‘Oops,'” said John LaForge, head of Real Asset Strategy at Wells Fargo. “The market simply reflects the immediate concerns. But if you really think about the future, you see that the world is clearly changing. It will be electrified and a lot of copper will be needed.”

Stocks tracked by trading exchanges are near historic lows. And the latest price volatility means new mining output — which is already expected to begin to decline in 2024 — could tighten even more in the near future. Just days ago, mining giant Newmont Corp. plans for a $2 billion gold and copper project in Peru. Freeport-McMoRan Inc., the world’s largest publicly traded copper supplier, has warned that prices are now “inadequate” to support new investment.

Commodities experts have been warning of a potential copper crisis for months, if not years. And the latest market downturn will exacerbate future supply problems — by providing a false sense of security, stifling cash flow and deterring investment. It takes at least 10 years to develop and keep a new mine going, meaning the decisions producers make today will help determine supplies for at least a decade.

“Significant investments in copper require a good price, or at least a well-observed copper price over the longer term,” said Rio Tinto Group Chief Executive Officer Jakob Stausholm in an interview this week in New York.

Why is copper important?

Copper is essential for modern life. There are about 65 pounds (30 kilograms) in the average car, and more than 400 pounds goes to a single-family home.

The metal, considered the benchmark for conducting electricity, is also the key to a greener world. While much of the attention has been focused on lithium – a key component of today’s batteries – the energy transition will be driven by a variety of raw materials, including nickel, cobalt and steel. When it comes to copper, millions of feet of copper wiring will be crucial to strengthening the world’s electricity grids, and tons will be needed to build wind and solar farms. According to the Copper Alliance, electric vehicles use more than twice as much copper as gasoline-powered cars.

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How big will the shortage be?

As the world goes electric, net-zero emissions targets will double demand for the metal to 50 million tons per year by 2035, according to an industry-funded study from S&P Global. While that prediction is largely hypothetical, given that copper cannot be consumed if it is unavailable, other analyzes also point to the potential for a spike. BloombergNEF estimates that demand will increase by more than 50% between 2022 and 2040.

Meanwhile, mining supply growth will peak around 2024, with a lack of new projects in the works and as existing resources dry up. That’s a scenario where the world could see a historic deficit of as much as 10 million tons by 2035, according to the S&P Global survey. Goldman Sachs Group Inc. estimates that miners will have to spend about $150 billion over the next ten years to solve an 8 million metric ton deficit, according to a report published this month. BloombergNEF predicts that by 2040, the hole in mined output could reach 14 million tons, which would need to be filled by recycling metal.

To put into perspective how huge that shortage would be, consider that in 2021 the global shortage stood at 441,000 tons, equivalent to less than 2% of the demand for the refined metal, according to the International Copper Study Group. That was enough to push prices up about 25% that year. S&P Global’s current worst-case projections show that the deficit will equal about 20% of consumption by 2035.

What does that mean for the prices?

“It’s going to be extreme,” said Mike Jones, who has worked in the metals industry for more than three decades and is now the CEO of Los Andes Copper, a mining exploration and development company.

Where are the prices going?

Goldman Sachs predicts that the London Metal Exchange’s benchmark price will nearly double to an annual average of $15,000 per tonne by 2025. On Wednesday, copper traded at $7,690 per tonne on the LME.

“All signs of supplies point to a rather rocky road if producers don’t start building mines,” said Piotr Kulas, senior base metal analyst at CRU Group, a research firm.

Of course, all those mega-demand forecasts are based on the idea that governments will continue to hit the zero targets that are desperately needed to combat climate change. But the political landscape could change, and that would mean a very different scenario for the use of metals (and the planet).

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And there is also a common saying in commodity markets that could come into play: high prices are the cure for high prices. Although copper has fallen from its March record, it is still trading about 15% above the 10-year average. If prices continue to rise, that will eventually push the clean energy industry to figure out ways to reduce metal consumption or even look for alternatives, according to Ken Hoffman, the co-head of the EV battery materials research group at McKinsey & Co.

Scrap supply could help fill gaps in mining production, especially if prices rise, which will “will allow more recycled metals to enter the market,” said BloombergNEF analyst Sung Choi. S&P Global points to the fact that as more copper is used in the energy transition, that will also open up more “recycling opportunities”, such as when EVs are scrapped. Recycled production will represent about 22% of the total refined copper market by 2035, up from about 16% by 2021, S&P Global estimates.

The current global economic slump also underscores why the chief economist of the BHP Group, the world’s largest miner, said just this month that copper has a “bumpy” path ahead of demand concerns. Citigroup Inc. sees copper fall in the coming months due to a recession, mainly driven by Europe. The bank has a forecast of $6,600 in the first quarter of 2023.

And the outlook for demand from China, the world’s largest consumer of metals, will also be a major driver.

If the Chinese real estate sector shrinks significantly, “that is structurally less demand for copper,” said Timna Tanners, analyst at Wolfe Research. “To me, that’s just an important offset” to the net-zero target consumption projections, she said.

But even a recession will only mean a “slowdown” for demand, and it won’t “significantly dent consumption forecasts for 2040,” according to an Aug. 31 BloombergNEF presentation. That’s because so much of future demand is being “legalized in,” through governments’ focus on green goals, making copper less dependent on the wider global economy than it used to be, Wells Fargo’s LaForge said.

Moreover, there is little leeway on the supply side of the equation. The physical copper market is already so tight that despite the decline in forward prices, the premiums paid for the immediate delivery of the metal have increased.

What’s holding back inventories?

Just look at what’s happening in Chile, the legendary mining country that has long been the world’s largest supplier of the metal. Copper export revenues are declining due to production problems.

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In mature mines, the quality of ore deteriorates, meaning the output either slips or more rock has to be processed to produce the same amount. And meanwhile, the pipeline of committed projects in the sector is growing. New deposits are becoming more difficult and expensive to both find and develop. In Peru and Chile, which together account for more than a third of global production, some mining investment has stalled, partly amid regulatory uncertainty as politicians chase a larger share of profits to resolve economic inequalities .

Rising inflation is also driving up production costs. That means the average stimulus price, or the value needed to make mining attractive, is now about 30% higher than it was in 2018, about $9,000 per tonne, according to Goldman Sachs.

Worldwide, supplies are already so tight that producers are trying to squeeze small nuggets out of junky waste rocks. In the US, companies are facing roadblocks. In Congo, weak infrastructure limits the growth potential for large deposits.

Read more: Largest US copper mine stalled over sacred ground dispute

And then there’s this big contradiction when it comes to copper: The metal is essential to a greener world, but digging it out of the earth can be a pretty dirty process. At a time when everyone from local communities to global supply chain executives is tightening their control on environmental and social issues, it becomes much more difficult to get approval for new projects.

The cyclical nature of commodity industries also means that producers are under pressure to keep their balance sheets strong and reward investors rather than grow aggressively.

“The incentive to use cash flows for return on capital rather than for investment in new mines is a key factor leading to a shortage of the raw materials the world needs to decarbonise,” analysts at Jefferies Group LLC said in a report this month. .

Even as producers shift gears and suddenly start pumping money into new projects, mines’ long lead times mean that supply prospects for the next decade are pretty much set.

“The near-term situation is contributing to the stronger longer-term outlook as it has an impact on supply development,” said Richard Adkerson, CEO of Freeport-McMoRan, in an interview. And in the meantime, “everywhere you look the world is becoming more electrified,” he said, inevitably bringing “a new era of demand.”

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