Why Investors Should Consider Copper: An In-Depth Look

• Copper demand is expected to rise significantly due to electrification, renewable energy, EVs and AI
• Copper supply is increasingly constrained by declining grades, challenges in permitting new mines, and lack of new discoveries
• Treatment charges indicate an extremely tight market for copper concentrate
• Significantly higher copper prices of $7-10/lb may be needed to incentivize new mine development
• China is securing global copper assets to support its electrification and EV battery technology leadership

Introduction

As the world transitions from fossil fuels to electrification and governments fund infrastructure rebuilding projects, copper is poised to play a critical role. Copper consumption is expected to rise significantly in the coming years, driven by the growth of electric vehicles (EVs), renewable energy, power grid infrastructure, and even artificial intelligence. For investors, the copper market presents a compelling long-term opportunity. In this article, we take an in-depth look at the demand and supply dynamics shaping the copper market, and why investors should consider gaining exposure to this essential metal.

The Electrification Megatrend

One of the key factors driving copper demand is the global shift towards electrification. And the metal that brings all of that together is copper.

Copper is used extensively in EV batteries, charging infrastructure, and the electrical grids that connect everything. As the uptake of EVs accelerates, reaching a tipping point of 10-20% of vehicles on the road, copper demand is expected to surge. This will likely require significant spending on electrical grids to support the increased load. In addition to EVs, the growth of renewable energy sources like wind and solar also requires substantial amounts of copper. Even artificial intelligence, which is highly power intensive, will lead to higher consumption in electrical grids.

Emerging Market Demand

While the electrification trend is the key driver in developed markets, copper demand growth in emerging markets will be underpinned by efforts to provide electricity access to the billions of people who currently lack it.

As Rick Rule has pointed out, there are roughly a billion people on earth without electricity access, and another 2 billion with intermittent or unaffordable power. Copper will be essential in building out the power infrastructure needed to change this.

Supply Constraints

On the supply side, the copper industry faces significant challenges in meeting the expected demand growth. Declining ore grades, difficulties in permitting new mines, and a lack of new discoveries are all contributing to an increasingly constrained supply picture.

The industry has been depleting some of the world's greatest copper discoveries, with many large mines in Chile not in their prime anymore and requiring significant reinvestment to shift to underground operations. While technology improvements like heap leaching have enabled the economic processing of lower-grade ores, ultimately "it's just mining out some of the high-grade deposits, and what's left is lower grade."

Permitting challenges are another major obstacle to new mine development. Of the top 100 undeveloped copper projects globally, over 50 of them will likely never be developed due to permitting issues. Even in the U.S., major deposits like Northern Dynasty's Pebble project in Alaska and Rio Tinto's Resolution Copper project in Arizona face stiff opposition.

Finally, the rate of new copper discoveries has slowed in recent years despite robust exploration spending. While improved geophysics technology is enabling the discovery of deeper deposits, these are often uneconomic to develop.

Tight Concentrate Market

One indicator of the growing tightness in the copper market is treatment charges - the fees paid by miners to smelters to process copper concentrate. Treatment charges have fallen to all-time lows, signaling that smelters are desperate to get material.

China, which accounts for roughly half of global copper consumption, has been rapidly expanding its smelting capacity, putting further pressure on the concentrate market. Recent production curtailments, like the shutdown of the Cobre Panama mine, have exacerbated the tightness.

The Price Outlook

So where is the copper price headed? Copper prices have to go significantly higher than the historical all-time highs", potentially reaching $7-10 per pound, to incentivize the development of new supply. Copper price in 2023 was range bound between $3.80-$4.00.

Under the current environment, the incentive price required for the average new copper project to achieve a 15% after-tax IRR is in the $4.50-4.75/lb range. But prices would need to sustain significantly above those levels for some time so that the studies can be updated and the financing can be procured before major new mines are sanctioned.

Concerns about a global recession derailing the copper story may be overstated, as the push to combat climate change through renewable energy and EVs is going to continue regardless of a recession. Indeed, in the past two years, copper consumption in China has grown 4-5% annually despite weakness in their property sector.

The China Factor

Of course, no discussion of the copper market is complete without considering China. The country is not only the dominant consumer, accounting for half of global demand, but also a relatively minor producer. This has driven China to aggressively acquire overseas copper assets to secure future supply.

Certain commodities are not produced significantly in China. They just don't have the geological potential there. And copper is one of them. China has a unified vision for the electrification trend and is thinking longer term in locking up supply.

At the same time, Chinese EV battery makers currently have the leading technologies and are dominating that market. The efforts by Western governments to develop local battery supply chains will be a key factor to watch. Something's going to have to give in terms of subsidies from governments, otherwise, Tesla and the other car companies that are in the process of transitioning will have a tough time.

The Investment Thesis for Copper

• Copper demand is expected to grow significantly in the coming decades driven by electrification, EVs, renewable energy and AI
• On the supply side, the copper industry faces declining grades, a lack of new discoveries, and permitting challenges for new projects
• Current treatment charges indicate an extremely tight market for copper concentrate, which is expected to worsen as demand rises
• Significantly higher sustained copper prices in the $7-10/lb range may be needed to incentivize new mine development
• Investors can gain exposure to copper through mining equities; companies with high-quality projects and experienced management teams may offer leverage to rising prices
• Given the long lead times in developing new copper mines, it may be prudent to establish positions before deficits become acute and prices rally further
• While near-term economic uncertainty is a risk, the secular trend towards electrification is expected to underpin strong copper demand growth over the longer term

The global transition from fossil fuels to electrification represents a paradigm shift for the copper market. Demand growth from EVs, renewable energy, and power infrastructure is set to accelerate in the coming years, while supply faces significant constraints from geological, technological, and regulatory challenges.

For investors, this creates a compelling long-term opportunity. Copper prices may need to move significantly higher on a sustained basis to incentivize sufficient new production. Companies with high-quality projects in stable jurisdictions could offer meaningful upside as the market eventually rebalances at higher price levels. While near-term economic uncertainty is a risk, the secular trend towards electrification is likely to support strong copper demand over the longer term.