Yahoo Finance 'The basic metal of electrification': Why famed energy analyst Daniel Yergin sees a copper crunch looming
Numerous metals and minerals have been hawked as “the next oil,” but according to veteran energy historian Daniel Yergin, only one metal represents the linchpin of the energy transition away from fossil fuels — copper.
“Copper is the basic metal of electrification,” Yergin, vice chairman of S&P Global, told the Financial Post. “And the whole thrust of the post-Paris (2015 United Nations climate) conference is around electrifying the world, and so really, copper is that fundamental mineral that’s required for the energy transition.”
Unfortunately, he sees a looming supply-demand gap in copper that risks “short-circuiting” the energy transition and stalling global ambitions to slash greenhouse gas emissions to “net zero” by 2050.
That’s the conclusion that Yergin and his team of analysts at S&P Global Market Intelligence reached and compiled in a new 122-page report, released Thursday, that digs into the supply and demand dynamics, geopolitics and economic ramifications for copper in an increasingly electrified world.
A key fact undergirding the report is that all the technologies that are critical to an energy transition, including solar panels and wind turbines, electric vehicles and batteries, charging infrastructure and the wires that comprise the grid itself, require more copper than the technologies used to produce energy from fossil fuels.
To meet this new demand, the report estimates that copper supply needs to double by 2035 — from the current 25 million metric tonnes per year to a record 50 million metric tonnes per year.
“The thing that hits us, is the time frame,” said Yergin, who made his name and attracted a sizable following during the last two decades writing about both the history and the present-day dynamics of the oil and gas market. “If you want to get to net zero by 2050, you have to have things, electric cars, wind and solar, so forth, comprehensively in place by 2035, and that’s a pretty short time frame.”
The report lays out two scenarios. In the first, copper output, including from mines and recycling, grows at a steady rate of around 3.2 per cent per year. That leads to chronic supply-demand gaps.
Because copper is used so widely, in everything from electronics to jewelry, brass hardware and construction equipment, the persistent supply deficit creates cost pressures that translate into price inflation and supply-chain disruptions.
The second scenario envisions that mine production and recycling rates ramp up significantly by 2025. But even then, a supply deficit of 2.8-million megatonnes emerges by 2035. Although that is smaller than the 9.9-million megatonnes under the first scenario, both represent the highest copper supply deficits in decades, and would likely create price inflation.
“Just look what’s happening with the cost of electric cars right now — suddenly, costs are no longer going down,” said Yergin. “They’re going up because of the input and I think that’s kind of a preview of coming attractions, because copper is so pervasive in the economy.”
“Just look what's happening with the cost of electric cars right now — suddenly, costs are no longer going down
Daniel Yergin
The report concludes that copper shortages could delay how long it takes to reach net-zero emissions; Yergin also acknowledged that various other critical minerals — lithium and cobalt, for example — could well have an impact on climate goals too.
But it focuses on copper because of its versatility and essential role in power infrastructure, transportation and renewable resources.
Forecasts about supply and demand, of course, are notoriously difficult. Price fluctuations change incentives, so that consumers look for cheaper options, and commodity producers plow capital into increasing supply. Eventually prices retreat and the situation may reverse.
There’s also the possibility for innovation — what Yergin calls the “wildcard,” which could materially change the calculation.
But before that even happens, there is substitution of cheaper metals, which also makes deficits difficult to predict.
“We don’t run out of anything in commodity markets, we engineer out,” Colin Hamilton, a commodities analyst for BMO Capital Markets, told the Financial Post last month. “And therefore I’m looking at a situation where we’ll have to keep substituting copper with aluminum and with optical fibres and a number of areas to try and essentially make sure we don’t run out.”
The report discusses this briefly: for instance, aluminum substitution often happens at scale once copper becomes four times as expensive. But it discounts the possibility of this happening relying in part on a study by a copper trade organization.
Importantly, the report envisions the vast majority of needed copper coming from mines — and it should be noted that although it was independently researched, the report’s authors thank several major mining companies, such as BHP, Taseko Mines Ltd., Teck Resources Ltd. among others for support.
It suggests most new mines will be in Latin America, which will transform global geopolitics.
“World copper supplies are more concentrated than world oil supplies,” said Yergin. “Before the war in Ukraine, three countries were responsible for 40 per cent of world oil. Only two countries are responsible for 38 per cent of copper, Chile and Peru, so it is a rearrangement of the geopolitical map of energy that comes with this transition.”
On the supply side, Yergin and his team see the issues around new mines as one of the main choke points, citing an International Atomic Energy Association study that suggests it takes 16 years from discovery to first production at a major mine.
That lengthy time frame, and the idea that lead times are growing, not shrinking, may not surprise given the recent track record of mining companies in Latin America, many of which are headquartered in Canada or listed on a Canadian stock exchange.
In 2020, for example, a Chilean court upheld an environmental regulator’s decision that ordered Barrick Gold Corp. to close its Pascua-Lama gold and silver mine, located in a high-elevation spot on the border with Argentina, based on the operations’ impact to water supply and local glaciers.
Barrick had invested billions of dollars into the mine, and it would have been one of the largest mines in the world, capable of producing 850,000 ounces of gold per year for decades.
Chile, the largest copper producing country in the world, is redrafting its constitution, which would need to be approved by voters in the fall. Although its constitutional assembly has already rejected some of the more contentious proposals, such as nationalization of mining, reports suggest the final document is likely to strengthen environmental regulations.
John Mothersole, director, non-ferrous metals, economics and country risk, at S&P Global Market Intelligence, who contributed to the report, said that those changes to mining regulations may be a response to past experiences with the mining sector. The risk to the energy transition is that the environmental regulations are left in flux, and companies delay investments in a country until there is a more certain framework.
The energy transition may find itself tangled up with geopolitics in the years ahead, and in a way that people are not thinking about today
Daniel Yergin
“The flux or flexibility in regulations and tax and royalty regimes creates uncertainty and therefore inhibits investment and will prolong the energy transition,” said Mothersole.
Still, the report does not see any new countries emerging as major centres of copper production in the next decade.
Canada supplies about 10 per cent of the copper that the U.S. uses, but is not among the top 10 copper producers in the world. Importantly, neither is the U.S. The report suggests it would need to import 57 to 67 per cent of its copper by 2035.
China, on the other hand, represents the world’s third-largest copper producer, and it dominates the copper market in other ways, consuming 54 per cent of the world’s copper in 2021. It also operates 35 per cent of the world’s refining capacity — more than the combined capacity of U.S., Chile and Japan, the next three largest countries.
“The energy transition may find itself tangled up with geopolitics in the years ahead, and in a way that people are not thinking about today,” Yergin said.
But there are wildcards including innovations that make copper smelting more efficient, thereby increasing the supply.
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Non-energy transition uses still account for the majority of copper demand. Substitution may happen in unexpected areas as a result of unrelated technological innovation.
There’s also the possibility of a change in the rate of recycling that could dramatically alter the situation in foreseeable ways. The report looks at the impacts of both modest growth in recycling and changes, from around 15 per cent of supply over the past decade up to 26 per cent in the 2040s. Ultimately, it assumes that price corrections will limit recycling.
There’s also this from the report: “The total amount of copper on Earth is vast. The U.S. Geological Survey (USGS) estimates that, as of 2015, identified resources contained 2.1 billion metric tons of copper, and undiscovered resources contained an estimated 3.5 billion metric tons.”
While much of that copper would be considered irrelevant — because it is within low-grade deposits making it unprofitable to mine or located too close to populated regions, or conversely in remote regions lacking infrastructure — the amount thought to exist is more than enough for what is needed for the energy transition.
“We see this study really as a big wake-up call,” said Yergin. “Okay, you know what we want to do by 2050, but how we get there, it’s gonna be a rocky road.”
Financial Post
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