The copper price has run hard and could pull back, but that doesn’t mean that copper stocks aren’t worth buying. Our resources analyst Peter Chilton looks at the fundamentals, having spoken to a number of miners. As he says, “the copper outlook presents a great potential for explorers, producers and investors.”
A copper explosion
Copper has rallied from a price of around US$2 a pound in March 2020 to a current price of US$4.70. Highlighting the limited supply, LME copper metal stocks, which typically average at 300k tonnes, have fallen to 100-150k tonnes. Like lithium and nickel, copper is regarded as an electric vehicle metal, being a critical ingredient for the battery applications, but is also heavily used in the renewable energy industry. Importantly, there are no substitutes.
The copper market is heading for a severe supply shortage due to a perfect storm of under-exploration/lack of discovery of new deposits, clashing with a huge increase in demand due to electrification and decarbonisation. We believe that copper’s price strength is the first leg of a structural bull market in the metal.
In short, the copper outlook presents a great potential for explorers, producers and investors.
Copper is already a big market
Unlike lithium, which is currently a small market with massive growth ahead, copper is already a large market with global annual demand of approximately 24m tonnes a year. The red metal is arguably the best readily available and affordable electrical conductor, extensively used in building products, electric and electronic products, transportation and consumer and general products. Copper demand has been growing at around 2% a year.
Growing demand due to EV/renewable energy
This steady state growth for copper is changing with increased future demand not just for EVs, but also for the rise in solar and wind renewable generation. We estimate current annual copper demand for EVs, solar and wind combined will rise by over 4m tonnes a year from 1m tonnes to over 5m by 2030.
EVs use up to four times as much copper as an internal combustion engine (ICE) vehicle due to its electric motor, batteries, inverters, wiring and charging stations. An ICE might use 15-28kg copper, but an EV uses 85kg. One study projects EV related copper demand rising from a recent level of around 210k tonnes a year to 2.4m tonnes by 2030, with electric vehicles rising from around 3.1m units to around 32m units in 2030.
Solar power uses copper in its photovoltaic cells. In the same study, solar related copper demand is projected to rise from a 2020 level of around 400k tonnes a year to 1.6m in 2030. The case is similar for wind turbines.
Flat supply creates opportunities
At first glance, it might seem that the extra 4m tonne increase in copper demand over the next ten years to 2030 is not a big ask. However, this has to be seen in the context of stubbornly flat mined copper production averaging around 20.5m tonnes a year over the past 5 years, with the balance of demand obtained from recycled refined scrap.
The industry has had difficulty expanding production because of declining copper grades, reserve depletion, long lead times for new developments and mine closures. New projects tend to be capital intensive and need infrastructure, transport and port facilities to export the copper concentrates for smelting and refining. BHP commented in its 2020 annual report that it expects the lack of high quality copper projects to support prices in coming years as grades decline, resources are mined and input costs increase.
Maintaining production at current levels is a big ask. Commodities Research Unit (CRU) recently warned that without new investment, mined copper would drop from 20mtpa to 12mtpa by 2034, leading to a supply shortfall of greater than 15m tonnes a year.
Explorer potential: Stock picking is the key
The higher copper price is now providing an incentive for copper explorers, developers and producers. However, while copper occurrences are widespread, not many projects actually make it to become a mine. A lot of copper discoveries are just too small.
The quality of a copper project is key. Successful projects need a blend of grade, size, infrastructure, metallurgy, potential operating scale, long mine life and low unit costs to be bankable. Projects with by-products such as gold, molybdenum and cobalt provide credits to reduce unit costs.
Looking Under the Radar
The number of copper explorers and potential developers has increased, employing new exploration technology techniques to explore known copper areas or test new geological concepts in greenfield areas. Explorers are active around the world as well as Australia. Investors following the successful explorers as they progress have the potential for strong returns from a significant discovery.
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