🔒 Copper: The new oil or the next bubble? – Javier Blas

In the electrifying narrative of our energy future, copper emerges as the indispensable conductor, akin to the role oil once played. From Thomas Edison’s pioneering wires to today’s surge in demand for renewable energy infrastructure, copper reigns supreme. But amidst the hype, cautionary tales of past commodity bubbles loom large. With prices soaring to unprecedented heights, can copper maintain its momentum? Delve into the complex web of supply, demand, and speculative fervour driving the red-hot copper market.

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By Javier Blas

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.  ___STEADY_PAYWALL___

Fast forward nearly 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 will 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 déjà vu: The same narrative served to inflate the bubbles in battery metals — lithium and cobalt — and rare earths elements a few years ago. Their prices all crashed after a short-lived, hyped bull run. Copper isn’t 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 $11,000 a metric ton, surpassing the previous peak of $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. told investors recently that “copper’s time is now.”

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

Yet current 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 premia 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 hasn’t happened in years. It’s 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 tons now to 50 million 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.

Yet those demand projections aren’t 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 isn’t moving toward net zero by 2050 (not even close). Now look who’s 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 $10,000, the incentive to switch increases. Copper is the best affordable electricity conductor, but aluminum, which costs about $2,600 a ton, 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 tons by 2050, well below the uber-bulls’ scenario.

What about supply? There I’m more sympathetic with the bulls. Clearly, the easiest copper deposits have been tapped. Extra production will 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. But M&A doesn’t create new supply. Old-fashioned exploration, followed by building mines from scratch, does.

But there’s plenty of copper to be found now, given the price incentive. The Democratic Republic of Congo is an obvious place. Yet 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 isn’t 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’s never materialized. Granted, even the less optimistic demand-and-supply forecast sees a market deficit over the next decade, but the gap isn’t nearly as big as the bulls suggest.

Then there’s 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 isn’t, not by a long shot. Here’s 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’s bought once and used multiple times. Think about an electrical cable, which, after it’s 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’s burned. That’s a crucial distinction many bulls seem to overlook.

It doesn’t help that the International Energy Agency 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 will happen in metals.

Add it all up and the case for higher-for-longer prices is there. But remember that copper traded at an average of $2,200 during the 1990s, and $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 will jump to $40,000 in five years, up from $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 will come true too. One also must expect that technological innovation won’t reduce the need for metal; that geopolitical crisis and trade wars won’t derail global economic growth; and that recycling rates won’t improve. That’s a lot – really, a lot – to assume.

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