Are Fears of a Global Copper Shortage Overblown?

Mohit Oberoi, CFA - Author
By

Jul. 15 2022, Published 8:25 a.m. ET

Over the last few years, analysts have been forecasting a global copper shortage. Recently, S&P Global published a report which forecasts a massive global copper shortage in the long term. However, at least in the short term, fears of a copper shortage are overblown.

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The copper price hit all-time highs in March 2022 as commodities soared after the Russian invasion of Ukraine. However, prices have since fallen to the lowest level since November 2020. Copper prices are seen as a reflection of the global economy. Copper has the ability to predict economic cycles.

Copper markets are expected to be in a surplus in 2022 and 2023.

Before analyzing the copper shortage, it's important to understand “surplus” and “deficit” in commodity markets. When the production of any commodity is lower than its demand, the market is in a deficit. Similarly, when the production is higher than the demand, then the markets are in a surplus.

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Global copper markets are expected to be in a surplus in 2022 and 2023 due to higher supplies from new mines. Notably, this doesn't factor in a global recession or a hard landing for the U.S. economy, which could lead to an even wider surplus. Simply put, there doesn't appear to be a near-term copper shortage. However, the long-term picture is a bit nuanced.

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Renewable energy and the electric vehicle transition are expected to fuel global copper demand.

The world is slowly but surely pivoting towards renewable energy and EVs. The copper intensity in EVs and renewable energy is higher and more copper goes in every electric car compared to the ICE (internal combustion engine) alternative. Similarly, more copper is needed per megawatt installed capacity of solar and wind energy than in thermal power plants.

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As global EV penetration grows, the demand for copper will also rise. Global EV sales more than doubled in 2021 and sales are expected to keep rising at a fast pace as global EV adoption rises.

S&P Global expects global copper demand to double to 50 million metric tons by 2035. If mining companies don’t invest in new mines, global copper markets would see a massive shortage, according to S&P Global.

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Copper production is concentrated in Latin America.

Copper production is concentrated in Latin America and the largest producer Chile accounts for a quarter of global production. Peru is the second-largest producer followed by China and the DRC (Democratic Republic of Congo). Given the concentrated nature of copper supply, it's susceptible to disruptions.

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Several of the new mines in Latin America have been facing protests from local communities, which has led to delays. In the DRC, political stability is an issue as the country looks at increasing its copper output. Russia is also among the top 10 copper miners. There are concerns about the long-term copper supply from Russia after it invaded Ukraine.

Markets were concerned about copper supplies coming out of Chile after leftist leader Gabriel Boric was elected to power. Copper stocks fell after his election as markets feared more fees and royalties under his government. A labor impasse at copper mines is common and forecasters build the expected disruption into their annual forecasts.

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There could be a long-term copper shortage.

If the world has to transition towards a greener future, it will need a lot of copper. However, copper supplies might not keep pace with the demand, going by current capex plans. The situation might not be as dire as many analysts fear. Miners would eventually scale up their capex budgets to meet higher demand.

Copper will be among the most sought-after metals in the mining industry in the near foreseeable future given its centrality in green energy and electric vehicle transition.

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