Bloomberg — Copper’s rally to $10,000 a ton, just days after the surprising news that BHP Group is trying to buy Anglo American, highlights a fundamental disconnect at the heart of the industry: miners simply aren’t building enough mines.
See more: Southern Copper raises production forecast amid tight metals market
The largest producers want to increase copper production to take advantage the growing demand for electric vehicles, network infrastructure and data centers. BHP has made its $39 billion bid to buy Anglo American largely because the world’s largest mining company wants to grow in the copper sector.
However, this bullish attitude has not yet translated into the large investments necessary to develop new fields, wells and associated infrastructure. A successful acquisition would make BHP the largest copper producerwith approximately 10% of the market, but would make no difference in meeting global supply needs.
Production from existing mines is set to fall sharply in the coming years, and miners would need to spend more than $150 billion between 2025 and 2032 to meet the industry’s supply needs, according to CRU Group.
Copper supply will plummet if miners do not spend
“Copper appears to be the latest supply risk for the electric vehicle industry,” said Bernard Dahdah, senior commodities analyst at Natixis SA. “In a net-zero emissions scenario, we will need a lot of copper and we will need a different strategy to increase supply.”
The supply issue has been the driving force behind copper’s 16% rally this year. Unlike the last time prices hit $10,000, demand for copper is relatively tepid right now and the physical market is well supplied.
Instead, the rally is being fueled by investors betting on looming shortages and the expectation that mining executives and their shareholders are not ready to finance and build enough new projects, preferring to buy up their competitors.
The reasons behind the lack of investment are not new, but they are getting worse: it is increasingly difficult to find high-quality deposits, as well as financing for small explorers; Social and environmental resistance to mining is growing, and the cost of labor, equipment and raw materials has increased. And the few miners who have continued building have fallen on hard times lately.
Speaking at the copper industry’s annual Cesco Week event earlier this month, and a day after BHP had privately presented its proposal to Anglo, Laura Whitton, BHP’s head of copper and potash strategy, provided an evaluation of the difficulties and the highest cost of copper mining.
He said the world is more reliant on older mines with lower ore grades than in the past. “In terms of supply, there is a real challenge.”
Copper miners need to spend big to fill supply gap
Although the copper market is relatively well supplied for now, investment bank analysts and a growing crowd of hedge fund investors are increasingly optimistic about the outlook, believing it has the potential to reach unprecedented levels in the coming years. coming years as the market faces increasing shortages.
One of the key challenges is that new mines take years, and even decades, to build, so decisions must be made based on whether future copper prices will justify the investment.
According to Olivia Markham, who co-manages the BlackRock World Mining Fund, miners would need $12,000 per ton of copper to justify spending on new mines. Even then, their investors may be reluctant to finance them.
Copper claims the US$10,000 mark
“On a geological level, we have the projects, what we need is the money,” Dahdah said. “The last time copper prices hit $10,000, miners didn’t increase spending, they increased dividends.”
Lessons from the last decade suggest that if money is flowing, it could come from China, but there are headwinds there too. Chinese miners were responsible for about 40% of the net increase in supply over the past decade, but that figure appears to be declining to 16% over the next five years, according to McKinsey and Co.
Significant Chinese investment in overseas mining assets has already disrupted markets for key battery metals such as nickel, lithium and cobalt, putting them all in surplus. Copper is also a key component in electric vehicle batteries and motors, but the global market is so large that China will not be able to solve the industry’s supply challenge alone.
“There is a clear and compelling need to add additional mining capacity,” said William Tankard, principal base metals analyst at CRU. “A challenge is being issued to the miners, and it will be exceptionally difficult to meet.”
Read more at Bloomberg.com
