In April of 2011, I joined BMO as a senior energy analyst and member of the global commodity strategy team. Left behind was a renewable and clean energy focused hedge fund which had been hit hard by the 2008 Global Financial Crisis. By 2011, many commodities had recovered from the recession, with copper reaching new highs in what was part two of a ten-year supercycle. From the start of 2003, oil price had risen by more than 300% and copper was now up over 500%. Sadly – at least from the perspective of a long-only energy sector analyst – April 2011 marked the peak of that supercycle. What ensued has been a decades-long downward spiral for the broader commodities markets as the Chinese economy cooled on a relative basis and heavy producer investment tipped supply and demand balances into surplus. In recent months the idea that a new commodities supercycle may be at hand has gained increasing traction among strategists and investors around the world. There have been many a false dawn over the last ten years, but has the worm now finally turned for the broad basket of commodities? The answer to this question really comes down to how one defines the term “supercycle.” As the world emerges from the grip of Covid-19, multiple commodities markets have turned quite bullish, but the term supercycle generally refers to a multi-year expansion driven by imbalances in both supply and demand which at a minimum should see past market price highs challenged. For most commodities this threshold will likely not be met. Copper stands out as a commodity that looks set to fit the bill.
Over the last 12 months, copper markets have witnessed a strong rally. A stimulus-driven V-shaped economic recovery in China, a country accounting for ~51% of global copper demand, drove a 13% year-over-year jump in copper usage. By year end, global apparent copper usage had risen 2.2% as compared to 2019, while supply expanded by 1.5% over the same period. The new year started with low copper inventories and the market facing another year of supply deficit. The forecast from The International Copper Study Group states that in 2021 supply will fall short of demand by around half a million tons and copper prices will likely test 2011 highs at $10,000 per ton.
Longer term the themes of electrification and digitization are copper-intensive applications which will be additive to what has long been an emerging markets industrialization and urbanization story. Copper’s low resistivity and resistance to corrosion make it ideal in electrical applications, and in 2019 the Construction and Infrastructure sectors accounted for a combined 44% of global copper demand. The Covid-19 pandemic has prompted trillions of dollars in fiscal and monetary stimulus programs around the globe. Many of these programs will emphasize decarbonization through increased use of renewable and clean power, which is a copper-intensive endeavor. A year ago, China’s Politburo Standing Committee announced a 5-year “New Infrastructure” agenda. The goal is to direct $1.4T in public spend to build out power hungry data centers, rail projects, 5G networks, industrial internet, artificial intelligence, ultra-high voltage, and new energy-charging stations. China’s State Grid Corp, the world’s largest utility, intends to invest $900B between now and 2025 in its power network, with much of this spend directed at incorporating clean generation into the grid. China looks to have 1,200GW of wind and solar capacity online by 2030, up from 450GW at the end of 2020. Wood Mackenzie envisions Chinese EVs taking 80% of new vehicle sales by 2030 from only 6% last year. To support this growth the Chinese government intends to build vehicle charging networks across 176 cities by the end of 2021. President Xi has said carbon emission levels in China will peak before 2030, with carbon neutrality reached by 2060. Urbanization also continues with China’s 14th 5-year plan which aims to increase the urban population by an additional 50M citizens. The European Union is looking to implement a €750B recovery fund of which at least 30% is expected to be directed at achieving climate objectives, which include a 55% reduction in emissions by 2030 (from 1990 levels), zero net vehicle emissions by 2030, and achieving carbon neutrality by 2050. Offshore wind, solar, energy storage, electric vehicles and hydrogen are all tools to achieving these objectives. President Biden’s Infrastructure Plan seeks to build a clean energy economy in part through investment in modern and sustainable infrastructure. President Biden has recommitted the United States to the Paris Accord and has said he would like to achieve a carbon pollution-free power sector by 2035 while setting the country on a path that delivers a net-zero emissions economy by 2050. While US federal government politics insert much opacity into the conversation, it is worth remembering that state governments and the business community continue to lead the charge on emissions and renewables. US companies such as Walmart, Visa, Google, Microsoft, 3M, Ecolab, General Mills, General Motors, Ford, Nike, Verizon, etc., have all pledged to shift their power use to 100% renewable. The six largest US banks have announced that they and the companies they finance will achieve carbon neutrality by 2050. General Motors announced it would have 30 electric vehicle models available by 2025 and only offer EVs by 2035.
Going green is good for copper demand. A passenger electric vehicle contains 4x the amount of copper as a model propelled by an internal combustion engine. The combination of batteries, inverters, motors, and wiring add over 150lbs of incremental copper demand per vehicle. Depending on their size, vehicle chargers add an additional 2 to 18lbs of copper demand per copy, and then there is the associated investment in grid infrastructure. Newly added renewable power sources such as wind and solar consume 3 to 15 times more copper per unit of capacity as their conventional-power peers. EVs and renewable power are expected to be the fastest-growing demand centers for copper over the next decade. Bernstein estimates that by 2030 these two end markets will represent 26% of copper demand vs. 5% today. The outlook for demand from traditional sources remains positive as well. US new home construction has trended back up towards the long-term average of 1.5M units per annum (factors include growing household formation, low rates, limited inventory, and pandemic effect), while fires in California and storms in Texas have highlighted the need for significant power grid investment. According to the International Copper Study Group, a new single-family home in the US on average contains 439lbs of copper, while a dishwasher utilizes 5lbs and refrigerator 4.8lbs. Meanwhile, per capita consumption of copper globally is only 5.7lbs per annum. This statistic says the emerging markets urbanization story still has a long way to run.
On the copper supply front, the near-term outlook remains challenged. Covid-19 and labor strikes impacted mine output over the last 12 months, while inventories have dropped well below historic averages just as the global economy recovery is accelerating. These factors should keep the copper market tight into 2022. The real debate heats up when looking at the mid-2022 through 2024 timeframe. On paper, announced projects will result in significant new copper capacity entering the market – perhaps as much as 5.1% per annum supply growth over the next several years – which would put downward pressure on prices. In reality, nothing ever goes as planned in global copper markets, and actual growth has always fallen short of expectations. After an extensive bottom-up analysis of 57 individual copper projects, Deutsche Bank’s Global Metals & Mining team concluded that copper markets will remain in deficit for the next several years, with potential for a small surplus developing in 2024. Geology, construction delays, funding, environmental regulations, and social issues are among the factors which may cause a divergence between announced and actual supply growth. At a minimum, supply additions should at least temper upward copper price momentum medium-term.
A consensus view has emerged among Wall Street and industry experts that from 2025 supply will not be able to keep pace with demand. While copper itself may not be a scarce material, there is a paucity of large-scale, high quality projects to meet accelerating demand. The CEO of Freeport-McMoRan recently said that a new resource discovered today would take around 14 years to become a producing mine. Half of that timeline is spent dealing with permitting, social, and environmental issues. The new copper discoveries have generally been smaller in scale, hold lower copper grades, and exist in more politically challenging areas of the world. There has also been a fundamental shift within the major mining companies; they have recalibrated priorities and now generally focus on through-cycle returns over volume growth. This dynamic has reduced industry spend on exploration and new project development. According to Bloomberg, Capex from the world’s 40 largest mining companies dropped to record lows in 2016 and has yet to significantly recover. Aging mines are seeing declining ore grades, meaning less supply for each ton of dirt mined, while operational efficiency at mines has generally been stagnant. In short, the projects are not in the pipeline to meet expected long-term copper demand. As a result, copper markets are likely to see a growing supply deficit and rising prices through the back half of the decade.
Copper is a commodity displaying all the hallmarks of an impending supercycle. Economic stimulus provides support for demand in the near to medium term while metal-intensive Electrification and Digitization serve as an impetus for above-trend growth over the long term. Supply will fall short of demand once again in 2021, but from 2022 to 2024 markets will likely become more balanced with the possibility of a short-term surplus developing. While this may set the stage for a pullback, the longer-term fundamentals should be supportive of continued above long-term averages. Copper has an electrifying outlook from 2025 on as the world transitions to a lower-carbon future, which will be achieved through the deployment of more copper-intensive applications.