Sun, May 26, 2024 page9

• Copper’s boom story has some truth — and lots of hogwash

  • By Javier Blas / Bloomberg Opinion
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  When Thomas Edison wired his own house in Menlo Park, then a tiny village in New Jersey, he fabricated a primitive cable. As insulation he chose a mix of asphalt, linseed oil and beeswax, for the core, copper wire. Why? The metal is the second-best conductor, only behind the much more expensive silver.

  Fast forward about 150 years and copper remains as central to electricity as it did when Edison lighted the American evening. Now, as the energy transition aims to electrify everything, from driving to heating, copper would be everywhere too. Predictably, it has become the darling of the commodity market.

  The slogan is simple: In the climate-change era, copper is the new oil — a critical mineral essential to rewire our energy system with renewable power. As with every financial narrative, the story of the boom has a grain of truth — and ample hogwash.

  Cynical metals investors should be forgiven for having a case of deja vu: The same narrative served to inflate the bubbles in battery metals — lithium and cobalt — and rare earth elements a few years ago. Their prices all crashed after a short-lived, hyped bull run. Copper is not a bubble yet, but it is a crowded trade where everyone — commodity trading houses, hedge funds, Wall Street, mining executives — is betting in the same direction.

  Undeniably, the market is red hot. At the London Metal Exchange, benchmark copper prices surged on Monday to a nominal high above US$11,000 a tonne, surpassing the previous peak of US$10,850 set in 2022. In New York, prices surged even higher as a cluster of financial conditions, rather than fundamentals, engulfed the market.

  With mining companies announcing big downgrades in their supply forecasts for the year and inventories at low levels, the momentum is there for even higher prices. Goldman Sachs Group Inc recently told investors that “copper’s time is now.”

  Can copper surge to US$12,000 a tonne, maybe US$13,000? Perhaps. In 2008, during the China-led commodity boom, the metal briefly traded above US$8,000. In real terms, adjusted by inflation, it would need to rise to about US$14,000 a tonne in today’s money to match that peak.

  Yet demand — as opposed to that in a few years, when the energy transition gathers speed — looks flimsy. China accounts for about half of the world’s copper consumption, and its real-estate sector, a big consumer, is in the doldrums.

  The physical copper market, particularly in China, appears weak, with the premiums that users like manufacturing companies are willing to pay above commodity exchange prices to secure actual metal falling to historically depressed levels. In Shanghai, buyers are receiving a discount for the metal, which has not happened in years. It is difficult to reconcile financial-market exuberance, particularly in New York, and to a lesser extent, in London, with the gloom of the Chinese physical market.

  The uber-bull argument looks beyond present demand weakness into a future when, by the rosiest estimates, refined copper consumption doubles from about 25 million tonnes now to 50 million tonnes by 2035. The gap between ballooning demand and struggling supply implies the energy transition would be “short circuited,” consultancy S&P Global said in its The Future of Copper report, often cited by the bulls as proof of their argument.

  However, those demand projections are not forecasts, but instead scenarios built backward: Assume the world fully meets its net-zero-by-2050 commitments, and then estimate how much copper would be needed to make that happen. The problem is the globe is not moving toward net zero by 2050 (not even close). Now, look who is using those scenarios, too, as propaganda: the mining industry.

  That should tell you a lot about their usability.

  The super-bullish consumption case largely sidesteps other problems: With copper prices above US$10,000, the incentive to switch increases. Copper is the best affordable electricity conductor, but aluminum, which costs about US$2,600 a tonne, can replace it — and is already — in some applications. As prices rise, engineers would have a strong incentive to use copper more sparingly. CRU Group, a consultancy specializing in metals markets, has a far more nuanced view of copper demand, expecting it to reach less than 35 million tonnes by 2050, well below the uber-bulls’ scenario.

  What about supply? There I am more sympathetic with the bulls. Clearly, the easiest copper deposits have been tapped. Extra production would come from miners with lower ore grades, located in more difficult geographies, and probably with ore bodies buried deeper. The mining industry is engaged in mergers and acquisitions centered on copper — like BHP Group Ltd trying to buy Anglo American plc. However, M&A does not create new supply. Old-fashioned exploration, followed by building mines from scratch, does.

  However, there is plenty of copper to be found now, given the price incentive. The Democratic Republic of the Congo is an obvious place, but other regions in Africa offer opportunities. There, look for Chinese companies, like Zijin Mining Group Co, to expand quickly to ensure their home market has all the metal it needs. This is not just about finding new mines, but broadening the ways engineers can extract ore from the rubble. One of those systems is called sulphide leaching.

  For some time the mining industry has been projecting a huge “supply gap” 10 years out. It has never materialized. Granted, even the less optimistic demand and supply forecast sees a market deficit over the next decade, but the gap is not nearly as big as the bulls suggest.

  Then there is the psychological factor: the “copper is the new oil” slogan that makes one want to jump into the London Metal Exchange and hoard as much as possible. Just one slight problem: It is not, not by a long shot. Here is what I call it: The biggest baloney used by the bulls to advance their agenda.

  In the energy transition, copper is a “stock” commodity: It is bought once and used multiple times. Think about an electrical cable, which, after it is built, can carry power for years if not decades. On the other hand, oil is a “flow” commodity that must be bought repetitively as it is burned. That is a crucial distinction many bulls seem to overlook.

  It does not help that the International Energy Agency (IEA) and the International Energy Forum, two bodies with scant experience modeling metal supply and demand, are publishing reports screaming shortages. It reminds me of when the IEA used to warn the world about the upcoming oil production shortage. It never happened, and I doubt it would happen in metals. Add it all up and the case for higher-for-longer prices is there.

  However, remember that copper traded at an average of US$2,200 during the 1990s, and US$5,300 from 2000 to 2020, so current prices are already much higher than historical ones. The case for the most dazzling forecast — one commodity hedge fund manager says prices would jump to US$40,000 in five years, up from US$10,000 today — is highly speculative.

  One needs to assume that the most incredibly upbeat demand forecasts prove right — and simultaneously that the most downbeat supply forecasts would come true too. One also must expect that technological innovation will not reduce the need for metal, that geopolitical crisis and trade wars will not derail global economic growth, and that recycling rates will not improve. That is a lot — really, a lot — to assume.

  Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He is coauthor of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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