Wednesday , November 6 2024

Mining’s Energy Transition Dependent on New Copper Sourcing

As the demand for copper surges amid the energy transition, mining experts expect supply deficits to emerge in coming years, in part due to lacklustre investment in exploration and construction of new copper mines.

Mining company executives’ preference for safe, short-term returns has led to a massive underinvestment in new copper mines and exploration, jeopardising the metal-intensive energy transition. The shift toward decarbonisation will require vast amounts of copper to extend transmission lines, install new wire in renewable power sources, and electrify existing appliances and cars.

Despite this nearly certain demand, the mining industry has spent the past decade moving much of its profits away from finding and developing major new copper projects. Instead, industry members have favoured expanding mines with stronger guarantees of shorter-term shareholder returns and growing dividends and share buybacks. But new copper mines take decades to achieve commercial production, and they come with risks including permitting issues and shifting political landscapes.

Meanwhile, new discoveries are frequently of lower grades, making the copper more expensive to extract. All these challenges combine to create hurricane-force headwinds for a speedy economic transition toward electrification and renewable power. In the most optimistic scenario in its recent “Future of Copper” report, S&P Global estimates the world will be short 1.6 million tonnes of copper in 2035, with major deficits beginning this decade. In its most pessimistic view, that shortfall expands to 9.9 Mt in 2035.

“The challenge is that if current trends continue there will be a huge gap. Even if you put on your roller skates and your jet burner [to realise optimistic supply growth], and everything goes right, there’s still a gap, because it’s enormous. And it’s important to recognise that now, not in 2035,” said Daniel Yergin, Vice Chair of S&P Global and Project Chair of the Group behind the recent analysis, which projects massive copper deficits emerging in the coming decade.

According to Commodity Insights Mining Analyst Kevin Murphy, in part, the origins of the coming shortfall lie in the mining industry’s response to economic pressures in the wake of the 2008 financial crisis. After a frenzied upswing in metals and mining equities that started in the mid-2000s, the sector fell into a protracted bear market for about a half-decade after 2012.

“Companies were left with this huge debt level for these assets that they were developing. That led to this quite long period of rationalisation, companies opted to reduce what they had in their holdings,” said Murphy.

These cutbacks included exploration budgets. After peaking at approximately $1.41 billion in 2012, the exploration budgets of reporting copper-producing companies steadily declined through 2016 to $522.5 million. Exploration budgets rebounded slightly to $820.8 million in 2021, but that was still 41.6% lower than the 2012 high.

According to Richard Schodde, Managing Director at Minex Consulting, the frothy bull market in metals in the early 2010s drove miners to aggressively explore and develop less promising projects in the hopes of capturing high prices. Average discovery costs were less than a cent per pound of copper in the 1970s, surging to over eight cents per pound from 2010 to 2019.

“The reason why the last decade was almost a lost decade for copper was the fact that there was a hot market for exploration, which led to inefficient cost inflation. Many miners also targeted “low quality projects” in a bid to profit from known deposits rather than take risks,” said Schodde.

Lacklustre exploration spending has yet to stymie copper supply, as the new finds of 20 years ago are now in the production stage. Global production of copper has been on a steady upswing for decades as demand has climbed, including on a per capita basis.

For John Mothersole, Director of Monferrous Metals, Economics and Country risk at S&P Global Market Intelligence, the pipeline of future projects is thin, and the industry will be unable to meet anticipated demand. He explained that over the next 28 years, total copper demand is set to match cumulative copper consumption since 1900, this is from the “Future of Copper” report.

“Copper mines don’t grow on trees and we’re not going to have clean air or make a meaningful impact on the climate, nor are we going to be able to act on the so-called inflation reduction bill [in the U.S.], without a massive increase in demand for copper metal,” concluded Robert Friedland, Founder and Executive Co-Chair of Ivanhoe Mines Ltd.

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