Electric cars set to drive the scramble for copper By Stephen Bartholomeusz
6 September 2018 — 3:42pm
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There was a neat illustration of the difference between short and long-term perspectives earlier this week. Against the backdrop of a copper price that has fallen more than 20 per cent in three months there was a flurry of strategic copper-related corporate deals.
The one of obvious local interest was Wednesday’s announcement that BHP had paid $49 million to acquire a 6.1 per cent stake in the London-listed SolGold, an explorer that controls a highly-prospective copper resource in Ecuador, joining Newcrest Mining (14.54 per cent) on the register.
An electric vehicle (EV) being assembled at a plant in China. More than two-thirds of future demand growth for copper may come from EVs and their infrastructure.
Photo: Bloomberg
While that shapes up as an intriguing situation – in 2016 BHP offered to buy a 10 per cent stake in SolGold and fund it to the tune of $US275 million in exchange for a 70 per cent interest in its resources but its target preferred to link up with Newcrest – it wasn’t the only copper-related transaction on Wednesday.
China’s Zijn Mining Group over-bid Canada’s Lundin Mining Corp in an agreed deal to buy Nevsun Resources, also of Canada, for $US1.41 billion. Nevsun controls the Timok copper-gold project in Serbia.
In July, Glencore announced it would invest $US21 million in Brazilian copper producer Paranapanema for a 5 per cent stake. On Wednesday it followed that up with a $US100 million copper offtake agreement.
The plunge in the copper price, from above $US7000 a tonne in June to $US5823 a tonne on Wednesday, is almost certainly related to the escalation of trade tensions between the Trump administration and America’s major trading partners, particularly China, in recent months.
The copper price is highly-correlated to global trade and economic growth and the tit-for-tat tariff exchanges threaten both. The Trump administration is poised to slap tariffs on another $US200 billion of Chinese imports, so the prospect of a further deterioration in the outlook for global trade and growth is real.
The sensitivity of the price to that near term outlook tends to demonstrate that the supply and demand equation for the metal is reasonably balanced. The publicly-expressed interest of the major miners in increased exposure to copper, and the demonstration of that interest in Wednesday’s deals, suggests they don’t believe that will remain the case in the longer term.
Copper, of all the resource commodities, is regarded as having the best long term supply-demand fundamentals. Copper mines have relatively short mine lives and the existing tier one mines tend to be quite depleted, with rising costs and declining grades.
While there are some major new projects on the horizon – Rio Tinto’s Oyu Tolgoi underground extension in Mongolia and the Rio-BHP Resolution project in Arizona are among the relative handful of large projects on the drawing boards – the industry expects a yawning gap between supply and demand to open up relatively early next decade.
The dearth of new projects may owe something to the hiatus in exploration and development that occurred in the post-crisis period but the larger explanation is that major economic copper resources are scarce.
Recent Citi research estimated that copper was set for a "sustained period of sub-trend mine-supply growth – 1.2 per cent a year against the 4 per cent achieved in the past seven years. Citi estimated that prices need to rise to $US7500 a tonne in today’s dollars over the long term to incentivise sufficient new supply to balance the market.
If the supply side of the equation is lagging, demand isn’t. Whether it’s in telecommunications, electric vehicles, construction or aviation, the intensity of copper usage – and absolute demand – keeps growing.
An electric car, for instance, is estimated (by UBS) to contain about 85 kilograms of copper versus 25 kg for traditional vehicles. Citi believes more than two-thirds of the growth in demand for copper will come from the auto sector and related electric vehicle infrastructure.
There's 85 kilograms of copper versus 25 kg in traditional cars.
Photo: Supplied
China accounts for about half the world’s demand for copper and imports about 70 per cent of its requirements.
While its economic growth rate might have slowed, and the trade conflict with the US might have an adverse impact if it worsens, in the longer term China’s continuing development, its "One Belt, One Road’’ initiative and its plan to dominate production of electric vehicles (it accounts for more than 40 per cent already) underwrite future growth in demand.
Other developing economies pursuing industrialisation will only add to that demand.
The big miners understand the nature of the equation and the lead times it takes to bring major new mines to market. Today’s copper price is irrelevant, although, if sustained for a reasonable period, could help increase access to resources and lower the cost of access by imposing pressure on junior miners and their valuations.
If the gap between supply and demand does open up from the early to mid-2020s, there will have to be an absolute scramble to secure and develop new resources to replenish and add to their existing copper resources to meet that demand.
While it was a coincidence that there were three copper-related deals struck on the same day, it’s no coincidence that the interest in doing deals that provide access to copper is rising sharply.
MOD Price at posting:
42.0¢ Sentiment: Buy Disclosure: Held
