February 5th, 2022
Copper Market Outlook 2022 – the “New Oil” is preparing for liftoff
Dear Retail Investor,
Copper had a nice ride in 2021.
After a stomach-churning 2020, the red metal went on to rebound sharply in 2021, hitting an all-time high of $10,512 per metric ton on May 9, 2021 – an increase of 130% compared to March 2020’s pandemic lows.
As was the case with most commodities, copper prices jumped for several reasons: global supply-chain disruptions, which led to reduced output from Chile and Peru (the world’s top copper mining jurisdictions), economic stimulus, inflation, and the rollout of COVID-19 vaccines.
But it also started taking on a new narrative.
Suddenly, banks like Goldman Sachs starting calling copper the “New Oil.”
Exploration projects popped up. Pure-play and diversified miners, overall, enjoyed strong gains.
And everyone seemed to finally clue into the obvious . . .
Copper is essential for the green revolution
Copper is absolutely essential in everything that has to do with modern-day electrical systems.
It has superior conductivity, which is crucial in the collection, storage and distrubution of energy.
It’s highly malleable, meaning it can be bent, twisted and formed into countless shapes.
And it’s endlessly recyclable, without losing any of its capabilities.
In other words, it’s essentual for the green technologies that will get the world off of fossil fuels. So if the world is rapidly electrifying in the search to address climate change and reach the requirements of the Paris Agreement, then it’s obvious to assume that copper is a good bet.
- Electric cars require about four times more copper than typical gasoline powered vehicles.
- There are approximately 5 tonnes of copper per Megawatt in renewable energy systems.
- Offshore wind turbines require around 28,000 kg of copper.
- Renewable energy systems require up to 12 times more copper than traditional energy systems.
And the list goes on.
Copper is a critical metal and unless the green energy trends reverse, it will be needed in ever greater quantities in the years to come.
Where does this put copper in 2022?
2022 is a bit of a wild card when it comes to copper forecasts.
Copper has traditionally been called “Dr. Copper” due to its price being something of a bellweather for the health of the global economy.
And if that is still the case going forward, the price is telling us that this year is the calm before the storm.
While price forecasts vary slightly, most tend to agree that copper prices will ease up in 2022, and perhaps even dip a bit.
The World Bank recently stated they believe the average annual copper price will drop 6% to $8,800 per tonne this year.
While copper supply saw a slight deficit in 2021, the International Copper Study Group (ICSG) expects the copper market will be in surplus this year.
Why? Some major projects are ramping up. This includes Freeport’s large Grasberg mine in Indonesia, which has the world’s second largest copper reserve.
There’s also Ivanhoe’s massive new Kamoa-Kakula mine in the Democratic Republic of the Congo, which is expected to generate 3.8 million tonnes of ore a year at a high grade.
There are some major projects coming online as well, including Teck’s QB2 copper mine in Chile and Anglo’s Quellaveco project in Peru.
At the same time, scrap recycling of copper is expected to increase this year, as supply-chain bottlenecks free up.
And this situation will likely spill into next year; for instance, CRU, a commodity research company, expects a surplus in 2022 and 2023.
So at this point, you’re probably thinking . . . “why invest?”
The long-term demand has not been addressed
All the current surplus means is that we have managed to claw supply back up to equilibrium for a couple years.
Copper’s taking a breather, while supply chains sort themselves out and the world waits for this pandemic to officially end – or at least become a more tolerable endemic.
But there is a very large and important societal change on the horizon. It’s actualy already here, but we haven’t experienced its full impact yet.
In fact, copper is going to become so important for the global economy that we won’t have enough of it.
And this means . . .
A structural deficit is on the way
Currently, the world consumes about 25 million tonnes of copper per year.
This is right now—before we even start seeing a full shift to EVs and green technology.
And while the International Copper Study Group expects copper to be oversupplied by a sizable 328,000 metric tonnes this year, this surplus won’t continue.
There are two reasons why a surplus will be short-lived.
The first, as mentioned, is sheer demand. In fact, copper demand is expected to double by 2050.
The second reason is the mines themselves. They are getting harder to build.
Over the past several decades there has been a lack of investment in copper, due to a low price, increasingly strict regulations, and declining ore grades.
The high-grade Kamoa-Kakula mine in Congo is the exception, it appears.
Industry experts are also calling for a sizable supply gap to emerge in the second half of this decade, as demand continues to climb and new copper projects dwindle.
Projections vary, with some (CRU, Wood Mackenzie) noting that we could see a 10+ million-tonne supply gap starting to emerge after 2025.
So, with copper prices calming down this year and a stock market that hasn’t quite found its feet, it’s reasonble to conclude that . . .
It’s likely a good time to invest in copper
While rising costs are eating into profits, copper at its current price is profitable for a large number of miners.
Price predictions also vary widely, but over the medium- and long-term they are all up.
Such is the case with Goldman Sachs calling for $15,000 copper by 2025 (a 50%+ increase from where it’s at now).
This is by no means unrealistc, given that copper (like many commodities) is seen as an inflation hedge, with prices reflecting the state of the economy.
A quick look at a copper futures or miners ETF, such as JJC or COPX, gives an idea of the market’s current strength—buoyed by future demand.
Getting ready for a bull market
We’ve written previously on our belief that the Copper Run is Just Getting Started.
And judging by the various future demand scenarios that continue to pop up, we could very well be positioning for a multi-year run after 2022.
It’s not just the adoption of renewable technologies that will fuel copper demand (though that itself is massive), but also increased urbanization and populations.
The UN states that another 2.5 billion people will be added to urban centres by 2050. That’s more pressure on infrastructure, more electricity—and more copper.
This, combined with the fact that many people are eager to get their first EV and that governments are committed to green technologies, means we could be in for quite a ride.
The question, then, is when will this all be priced in?
Dear Retail Investors Editorial Team
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