“Every unit you can get your hands on”: Politics and protest disrupt global rush for copper
Copper prices hover near all-time highs as miners look for exposure to a metal crucial in renewable energy generation, transmission and storage.
Electric vehicles use up to four times as much copper as combustion equivalents. Wind farms, solar panels and electricity networks also depend on the reddish-brown metal. A staple of the telephone wires and pipes of the industrial revolution, copper is finding new uses in the transition to renewable energy.
Change won't come cheap. Copper prices are at multi-decade highs as covid-shuttered mines struggle to match growing demand. Raw materials make up between half and three quarters the cost of batteries, according to the International Energy Agency. Copper alone is 14% of the investment cost for electricity grids.
Now a perfect storm of politics and protest threatens to keep prices elevated for years to come. Rising community anger, proposed tax changes and production delays across key producing nations Chile and Peru are throwing up obstacles to today’s output and tomorrow’s investment.
With copper markets already tight after years of underinvestment, Luke Smith, a global resources portfolio manager at Ausbil Investment Management, believes the extra hurdles posed by regulatory and community risk could buoy copper prices for years to come.
“It’s a commodity that requires investment, and we haven’t seen enough to start with," he says. "Then to throw in these additional hurdles."
“Ultimately it feeds into a market that will continue to tighten given that lack of investment and lack of willingness from the major copper producing companies to redirect additional dollars into the region."
“You need every available copper unit that you can get your hands on, and we just can’t see how that’s going to play out,” he adds.
A time of scarcity
Copper’s supply problems have deep roots. Humans have mined the metal for millennia—the Copper Age predates its more famous cousin, the Bronze Age.
Over time high quality and accessible ore bodies have been exploited. Scarcer copper reserves are forcing miners to hunt beyond well-developed jurisdictions such as Australia or the United States, says Morningstar equity analyst Jon Mills. That often comes with greater regulatory risks.
“This increasingly becomes an issue as the deposits in various commodities become harder to find, more expensive to develop and are more likely to be found in emerging markets,” he says.
“As a result, country risk is something those investing in all these miners increasingly have to consider.”
Top copper producers Chile and Peru are in the regulatory risk spotlight after shock election victories last year for a pair of leaders calling for higher taxes and stricter regulations on resource extraction. The countries are the world’s number one and two copper producers, responsible for roughly 40% of supply.
Peru’s new socialist president Pedro Castillo has touted plans for higher mining taxes as part of plans to rework the social contract in the resource-rich country gripped by inequality. In neighbouring Chile, President-elect Gabriel Boric has thrown his weight behind a bill to raise mining royalties.
Investment bank Goldman Sachs said 4% of the global copper supply was at risk from the change, in a May 2021 note. The bill is working its way through Chile’s legislative system.
Members of both governments have also backed calls for stronger environmental regulations around mining. In a speech following his December election victory, Boric pledged to oppose a controversial US$2.5 billion Dominga iron-copper mine, approved previously in August.
Today's output and tomorrow's investment is threatened by political uncertainty in producers responsible for nearly half of global copper supply, says Ausbil’s Smith.
“Changes in potential royalty regimes, changes to operating regimes around water access as well. They’re ultimately feeding into less certainty within these key producing nations [Chile and Peru],” he says.
“So, one, it impacts near term production, but two, it impacts medium term production because you’re going to see reduced capital investment towards the region and that’s in a commodity that the demand is only strengthening.”
Changes in Lima and Santiago are already making waves overseas. Shares in gold and silver mining Hochschild Mining plummeted 30% in mid-November after the Peruvian government announced two of its mines would be closed “as soon as possible” due to environmental concerns. Discussions are ongoing.
Major Australian miners are conscious of the risks. BHP’s (ASX: BHP) 2021 annual report labelled regulatory risk as an “emerging theme” across the copper industry. The miner earns a third of its earnings from copper.
Ramping up supply is harder
Extracting and processing copper from lower quality ore deposits consumes more water and power. Chile’s mining industry uses enough water to supply three quarters of the country’s needs, according to Mckinsey & Co.
Greater strain on local resources and communities adds up to longer environmental approvals and more expensive operations, slowing the speed at which miners can expand supply, says Daniel Morgan, a mining equity analyst at investment bank Barrenjoey.
“The mining industry’s reaction function is a lot slower, which comes in various forms. Environmental approvals to get communities on side. That process takes a lot longer. As mines get deeper and lower grade you need a lot more investment and the lead time to invest and build takes longer.”
Resource use is contentious in Peru and Chile where mining often takes place in arid regions and competes for scarce water resources. Unhappy communities can shut mines for months. Indigenous groups shuttered Peru’s giant Las Bambas mine, responsible for 2% of world production, for chunks of 2021 as they demanded more jobs and money for one of the country's poorest regions.
Community backlash extends beyond emerging markets. In the US state of Arizona, court battles with Native American groups have kept the BHP and Rio Tinto (ASX: RIO) backed Resolution Copper mine on hold. The mine could ultimately provide up to 25% of US copper needs.
“Take Rio Tinto and the Juukan Gorge incident. Other communities around the world can look at that and say if that’s occurred to the local traditional owners from the global mining company, why couldn’t that happen to us too?” says Morgan.
Renewable energy to add incremental demand
Hurdles to digging copper out of the ground come as forecasters expect demand to jump thanks to the renewable energy transition. The International Energy Agency rates copper of “High Importance” for half of all clean energy technologies, more than any other mineral listed. It forecasts copper use doubling under its Net Zero by 2050 scenario.
Energy research group Wood MacKenzie says a structural undersupply of copper to the tune of 25% of demand, or 4.7 million tonnes, is likely by 2031.
Longer-term supply issues come as prices hover near all-time records. Prices almost doubled during the pandemic as covid restrictions at major mines ran up against the unexpected rebound in demand. Copper hit an all-time high of US$4.76 a pound in May 2021, up 89% compared to January 2020. The last time prices approached this level was 2011, amid the economic recovery from the global financial crisis.
Low inventories, strikes and covid infections have kept prices near their peaks. Copper futures closed on the Commodity Exchange in New York (COMEX) 15 February at US$4.48 a pound.
Rising demand and supply shortages mean many forecasters expect prices to remain high for years.
Reuters reports the median 2022 price forecast across 25 industry analysts at US$9,370/tonne or around US$4.25. Morningstar forecasts copper to remain at its current elevated prices in 2024, around the US$4.35/pound mark.
To be sure there are sceptics. Demand forecasts could overshoot if high prices drive users to substitute copper for other metals, according to Julian Kettle at energy consultancy Wood Mackenzie. Renewable energy adoption could also slow if elevated metal prices raise costs. New supply in 2022 and 2023 should see “small but significant” surpluses in copper markets, he says.
Miners look to copper
Bullish price forecasts mean miners are looking for exposure to what the industry calls “future facing metals”.
South 32 (ASX: S32) announced last October it would pay US$1.55 billion for a 45% stake in Chile’s Sierra Gorda copper mine. In a nod to tax concerns, the deal includes a “tax indemnity” from seller Sumitomo for changes to Chilean taxes, up to a cap.
BHP is looking at acquisitions to expand beyond its mainstay Pilbara iron ore, according to reports in January. Potential targets were said to include US copper giant Freeport McMoRan (FCX) and commodity trader and miner Glencore (GLEN), which derives roughly a quarter of its earnings from copper mining.
There is no doubt major miners want more exposure to copper, nickel, lithium and other future facing metals, says Morgan.
“Every company you talk to involved in mining would like to be in copper and like more copper exposure,” he says.
“BHP and Rio Tinto are acutely aware they are overweight iron ore, which has served them well as China urbanised. They are acutely aware that as China and the developing world gets more affluent, they are going to consume more base metals and anything that goes into the energy transition.”
Analysts at Macquarie bank argued in January that BHP’s unified structure, approved by shareholders last month, will simplify bolt-on copper acquisitions. Streamlining deals was a reason BHP management cited in support of combining the miner’s London and Sydney listings.
Rio Tinto’s expansion into copper moved one step closer to fruition in January. The miner waived billions of debt owed it by the Mongolian government to settle a dispute over the delay-plagued Oyu Tolgoi gold-copper mine, which sits atop one of the world’s largest deposits. Production is expected to begin in 2023.
Developing a new copper project can take up to ten years or more. If today’s high prices lead to new investment, the copper may not hit markets till the next decade.
Prices will need to go higher still to incentivize miners to find and dig copper out of hard-to-reach and hard-to-operate places, according to Ivan Glasenberg, former chief executive of miner Glencore, speaking last May.
“You will need US$15,000 copper to encourage a lot of this more difficult investment,” said Glasenberg.
“People are not going to go to those more difficult parts of the world unless they’re certain.”
This piece is part 1 of 2. Next week we explore investment opportunities in copper.