In recent years our long-term view of the copper market has foreseen falling production at existing mines coupled with a demand boost from electric vehicles (EVs) resulting in multimillion-ton-per-year shortfalls in supply and commensurately higher prices by the end of the next decade.
CRU Group’s “Copper Long Term Market Outlook,” which was published at the beginning of March, considers whether this narrative still holds true.
Copper price paradox
We continue to hold a positive long-term outlook on copper, predicated on a significant supply gap eventually opening up in the 2020s. However, today’s low $6,000 per metric ton copper price contrasts with project economics that require a much higher price to incentivize new mine capacity. For the major mining companies in particular, this presents a conundrum: Invest now in an attempt to maximize future cash flows while risking the ire of short-term-focused shareholders or wait until the copper price recovers but then potentially miss out on the most lucrative years of the next upturn?
Moving from surplus to deficit
Over the last year, we have fully incorporated a number of high-profile copper projects into our mine supply projections, including Quebrada Blanca Sulphides in Chile and Quellaveco in Peru. Board approval for these multibillion-dollar investments undoubtedly was helped by the period of near or at $7,000 per metric ton copper prices during the second half of 2017 and first half of 2018.
More broadly, renewed C-Suite confidence has helped firm up the project pipeline to the extent that we now expect almost 1 million metric tons per year more mine supply by the early 2020s than at this time last year. Looming market deficits have given way to modest surpluses, and prices are expected to remain below $3 per pound ($6,614 per metric ton) in real terms over the next five years.
The shift in the medium-term view raises the question as to whether the long-term outlook for copper also has changed. Previously, falling production at existing mines coupled with a potential boost to demand from EV production meant that multimillion-ton per year shortfalls in supply and commensurately higher prices were expected by the end of the 2020s. The “Copper Long Term Market Outlook” considers whether this narrative still holds true.
Project pipeline has grown significantly
Despite the stronger outlook for copper mine supply over the medium term, output from today’s operating mines is still expected to peak at around 22 million metric tons in 2021, reflecting a combination of declining ore grades and reserves exhaustion. Even accounting for approved projects only adds another three years before growth rates turn negative.
Some are now expressing concern that the lower copper price during the second half of 2018 and start of this year already means that there will be a dearth of investment in projects starting up in 2024 or 2025. However, looking slightly further ahead, a significant pipeline of projects remains that could begin to fill any gap in supply. These are rated by CRU as either “probable” (feasibility study and environmental permitting underway) or “possible” (pre-feasibility study underway or reasonable economics).
Indeed, the project pipeline in the decade ahead represents almost 12 metric tons per year of contained copper, which is 20 percent more than we were forecasting a year ago. It is more reminiscent of the outlook at the beginning of 2014 and 2015 than 2016 or 2017, when mining companies purged future investments in response to the sharp decline in the copper price and operating margins. The 400,000 metric ton per year of expansion plans for Collahuasi in northern Chile, which were presented by Anglo American in early 2018, is just one example of projects that have been added to our list over the last year.
Rationalizing the EV story
Looking back to 2017 in particular, some industry participants no doubt, though not us, saw potential growth in EVs as justification for an immediately higher copper price. Today, the market consensus appears more accepting that EVs are not meaningfully going to affect global copper demand until the mid-2020s, when global consumption should reach 1 million metric tons.
Nonetheless, the story remains compelling. Full battery electric vehicles (BEVs) consume four times as much copper as an internal combustion engine (ICE) vehicle and the associated infrastructure requirements (chargers and grid storage and infrastructure) also are copper intensive. Moreover, once an inflection point in EV sales is reached, subsequent growth rates are likely to be spectacular, taking related copper demand to 2.8 million metric tons in 2030 and to more than 5 million metric tons in 2035 in our projections.
For China in particular, where upwards of 50 percent of growth in EV-related copper demand is expected to occur over the next 15 to 20 years, the sector is critical to the demand outlook. Indeed, without it we estimate that Chinese refined copper consumption would fall by around 25 percent as investment in the electricity grid, real estate and other infrastructure begins to normalize.
Scrap uncertainties addressed
Last year China introduced restrictions on the import of low-grade copper scrap (Category 7) as well as placing a 25 percent tariff on secondary material imported from the United States. However, the resulting disruption to the market was less than expected, as material was processed elsewhere, e.g., Malaysia, and then redirected into China. Nonetheless a further tightening of import restrictions this year and the prospect of a full ban starting in 2021, countered by the possibility that higher grade scrap (Category 6) may be re-designated as a secondary resource, is creating uncertainty.
Unpredictable government policy aside, the longer term debate about scrap concerns the extent to which an apparently large and growing pool in China will be returned to the market either in the smelting and refining process or used directly by semis fabricators.
The existing domestic scrap collection infrastructure is rudimentary with relatively undeveloped supply chains and little in the way of automation: The top three scrap recycling companies in China account for less than 20 percent of the total market. This situation could, of course, change quickly, and our modelling suggests that by 2035 scrap will meet around one-third of China’s total copper demand. Even then, the scrap pool is expected to continue growing, so a more aggressive high-scrap scenario is justified.
Stacking up project costs
Project economics are the other consideration and here we use CRU’s in-house Copper Mining Cost Model. Dollar input costs and byproduct prices, along with the influence of individual country exchange rates, are key to determining expected operating costs. However, cash costs net of byproduct credits only tell part of the story. For the marginal project required to meet future demand in 2030, for example, this measure is well below even today’s copper price, and that is before sustaining capital, working capital and any central overheads allocation is factored in.
However, it is the development capital costs that really make a difference, as they account on average for around 40% of the full economic costs of production. Moreover, capital costs measured on a unit-per-metric-ton-of-copper basis have remained stubbornly high. Actual plant and equipment costs have less upward pressure on them than during the previous cycle, but harder to measure project costs, such as environmental permitting, health and safety and the social license to operate, continue to escalate.
The author has 20 years of experience in the metals and mining industry. He covers global copper demand and markets for CRU Group, London. More information on CRU is available at www.crugroup.com.