Why Copper is the new Gold?

This article explores why the demand for the red metal is surging and what impact will the copper shortage have on the transition to green energy?

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Demand for copper is surging. The red metal is a vital component for the construction and defense industries, as well as a key ingredient in electric cars, wind turbines and the power grid. Offshore wind, for example, requires about three times as much copper as does coal-fired power generation in terms of tons per gigawatt of capacity. The outlook for copper is very positive. But mining companies are having a hard time keeping up. There's this growing consensus that demand fuelled by the energy transition is going to outstrip supply, and that's why analysts are saying that we are simply not going to have enough of it.

Copper is the backbone of decarbonization goals and there is going to be a problem with this transition over the next ten years as it is very, very hard for the companies to even maintain the level of production that they have at the moment. Globally, existing mines and projects under construction will meet only 80% of copper needs by 2030. That has analysts predicting the red metal is at the start of a new bull market.

Copper prices have risen ~70% in the last 5 years from $2.17 to $4.27

In recent years, prices have soared. To keep up with demand the industry is faced with a number of obstacles, including the shortage of mining workers navigating regulatory hurdles, as well as pushback from local stakeholders due to pollution concerns. On top of that, mining is difficult, costly and often dangerous work. Mining is a very capital intensive business. It takes 10 to 15 years to build these mines. So what impact will the looming global copper shortage have on the transition to renewable energy sources?

Copper is essential to modern life, delivering electricity to our homes and powering our electronic devices. Because of its strength, efficiency and reliability copper is also the most economical conductor available, making it ideal for wiring systems. It is also a bellwether of the global economy. Global demand in recent years can be attributed largely to the economic growth and urbanization in China, which made up 54% of the world's consumption in 2021. But copper is also a critical mineral central to the energy transition in things like EVs and solar panels. An EV, for example, uses about 3 to 4 times the amount of copper as a typical combustion engine vehicle. In addition to being used in EV motors, batteries, and power cables, because of its high conductivity, it is the preferred choice for high speed data wires and is essential for the infrastructure that carries that power, so things like distribution, transmission lines, all the wiring, all the updates to the grid. That's all going to require so much copper.

Increasingly, the move towards AI and data centres is going to increase copper demand. Copper is also 100% recyclable, with the majority of the 550 million metric tons produced since 1900 still in use today. Recycling constitutes about 17% of the world's refined copper supply. North America dominates global copper production, with the region hosting 75% of the world's largest mines. Chile holds the top spot among producer nations at 22%, followed by Peru, the Democratic Republic of the Congo, China and the US.

But demand may already be starting to outweigh supply. While copper is abundant globally, only a fraction can be extracted cost effectively due to today's prices and technology. High grade economic copper resources are not abundant. These mines are either in risky regions or in very geographically challenging regions like high in the mountains in Chile or in the Gobi Desert in Mongolia. So, we have to go into these difficult regions of the world where there is no infrastructure, no water resources and no workers available to mine the red metal from the earth.

Constrained by investor pressure for dividends, international mining companies capital spending on new projects has remained subdued in recent years. For a while back in the 2010s, they spent a lot and investors didn't like it so now, the mining companies have pulled back on their exploration and production budgets and instead used that money to pay dividends and do stock buybacks.

Inflation and the high costs associated with building a new mine have been a major deterrent in expanding production as it requires investment of billions up front for a payout that might take 10 or 15 years to come in the future. Copper mining is highly water-intensive, depleting local water sources and exacerbating scarcity in arid regions. The extraction and processing stages often lead to contamination through acid mine drainage and heavy metal pollution. Local communities are up in arms due to these reasons and with ESG scrutiny of these projects, it can take a long time to secure new mining permits.

These macro economic factors are causing companies to be hesitant about investing in new copper supply. But despite those hurdles, there have been a handful of new projects. Mining giant Rio Tinto, one of the world's largest mining companies, has ramped up production of its giant Mongolian copper mine. And a startup backed by Jeff Bezos and Bill Gates has found a large scale copper deposit in Zambia. These updates are a silver lining among the dark clouds that plaque this industry.

Despite the challenges, the reality is without copper, without mining, there's no energy transition. There's no decarbonization. So, if we need to build the infrastructure for the world to continue to advance, we need mines.

Let's see what the future holds for us.