8 minute read
Jay Roberge (Tehama Capital)
Is copper the ‘new oil’? Or is it more important?
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Is copper the ‘new oil’? Or is it more important?
There has been a lot of media coverage referring to copper as the ‘new oil’ – and for good reason. Copper has played a key role in human evolution and will do so again as the world evolves to reduce global emissions with the electrification of the transportation industry.
Copper demand is on the uptick driving prices to new highs. As of May 7th 2021, copper rose 3.2% to settle at US$10,417 a tonne. Prices are up more than ~30% this year and have more than doubled from lows in March of last year. Copper is benefiting from renewed demand as global economic recovery picks up and as the battery electric vehicle (BEV) market continues to expand rapidly, while the metal is expected to experience a significant supply crunch as stagnated mine supply is not likely to keep with the growing global appetite. Some analysts have estimated copper to be at $15,000 a tonne by year-end. A Bank of America analyst recently called $20,000 a tonne by 2025.
Jay Roberge
Jay Roberge is managing director and founder of Tehama Capital Corp, a boutique merchant bank based in Vancouver, Canada. Mr. Roberge has served as executive management, and or director of several public and private companies in natural resources (mining), technology and energy industries. As founding partner in Tehama Capital Corp, Mr. Roberge has focused on transactional business and financing companies concurrently with a go public strategy in the Canadian capital market. Given his experience in technology, Mr. Roberge is recognised for his early participation and identification of rare earth elements and battery metals for their critical geopolitical and economic importance while always including copper as part of that narrative. Mr. Roberge is an avid supporter of international trade and investment between Canada and the rest of the world.
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Mass global government spending to boost economic activity that had dried up as a result of the COVID-19 pandemic continues to enter the financial system. Most governments are focusing a considerable amount of stimulus spending on infrastructure, and more specifically ‘green economy’ spending that will support efforts to reduce carbon emissions. The main strategy in nearly every government plan is the electrification of the transportation industry. Countries around the world are looking to combat climate change and a key component to this battle is the adoption of BEVs.
Since opening its first Gigafactory in 2016, Tesla has led the auto industry
evolution into BEVs; and the industry has followed suit with battery megafactories being built around the world at an alarming pace. In 2020, approximately $65 billion in capital was committed to battery cell manufacturing. Benchmark Mineral Intelligence, a research and analysis company specialising in the lithium-ion battery supply chain, is currently tracking over 200 battery megafactories around the world. In 2020, global car sales in 2020 were down to 63.4 million from 74.3 million in 2019. Electric vehicles had a banner year despite the pandemic with sales of BEVs and plug-in hybrid electric vehicles (PHEVs) making up 4.2% of the global car market, up from 2.5% in 2019. With a wide range of new vehicles at affordable prices coming to market, sales are expected to continue to grow. Most projections have electric vehicle sales representing about 10% of all vehicle sales by 2025. A very strong growth trend.
While a conventional car contains 18-49 pounds of copper, a BEV contains around 180 pounds of copper. Furthermore, a battery electric bus contains around 814 pounds of copper. And for those wondering, a hybrid electric vehicle requires approximately 90 pounds of copper. It’s easy to conclude that the electrification of the auto industry is well underway, and it’s going to require
increasing amounts of cover as more and more BEVs are sold each year.
But while politicians have all rallied behind the call for meeting net zero carbon by 2050, few - if any - ever refer to the amount of raw materials required to build out this battery electric future. Case in point, UK Prime Minister Boris Johnson pronounced in June 2019 that all new car sales and existing vehicles in the United Kingdom will be battery electric by 2050 - an objective supported by many leaders of other leading economies.
About two weeks after this announcement, UK Natural History Museum head of Earth Sciences Professor Richard Herrington and fellow expert members of SoS MinErals wrote a letter to the UK Committee on Climate Change expressing their concerns and stated that in order to meet these stated objectives the UK would require at least half of the world’s copper production (approximately 2,362,500 tonnes of copper using 2018 production numbers). That’s just for the UK; they are likely not going to be able to secure half of global copper production, especially when China has been investing and securing raw material sources for the last decade while the rest of the world argues over the environmental impact of mining.
When it comes to the lithiumion battery, it is easy to see why many would refer to copper as the ‘new oil’. But equally important are the other key elements required to make a lithium-ion battery – namely lithium, nickel, cobalt, manganese and graphite. Each of these elements can be used in various volumes depending on the application of the battery, and each one has its own supply challenges. In general, all of these elements are required. New battery chemistries will evolve and require difference amounts of different elements depending on the application. But for now, the lithium-ion battery in its various forms will be the predominant battery of choice for the next decade and copper will always be a part of that chemistry.
In addition to BEVs, investment is focused on energy storage and charging infrastructure. Outside the battery itself, no other element is more critical to the overall electrical grid than copper. Copper is a key component to every aspect of the electric power grid. So whether you are generating electricity via a turbine (copper) within a hydro-electric dam, transmitting it across power lines (copper) to the city, or storing it in the lithium-ion battery in a Tesla; it requires copper. In the case of the UK, Prof Richard Herrington et al estimate that a 20% increase in UK-generated electricity would be required to charge the current 252.5 billion miles driven by UK cars.
While demand is growing, copper supply is a real concern. For years, industry has been warning of the fragile balance between supply and demand. Industry has been voicing concerns over declining grades and insufficient new discoveries to replace current mines that are nearing the end of their production life cycle. The number of new world-class discoveries coming online will decline substantially and depletion problems at existing mines will accelerate. Many analysts have long predicted that the copper mine supply growth will grind to a halt this decade.
In general, the world has neglected to invest in exploration and development over the last decade. Not just in copper but in most all elements. With copper prices at 10-year highs we will see more capital investing in exploration and development. In a recent interview with the Financial Times, Ivan Glasenberg - the CEO of Glencore - stated copper prices would need to rise to $15,000 per tonne in order to have enough new supply to meet projected demand.
New supply will start to come into the market over time, but it may not be enough to meet the expectation. The complexities of mining and inconsistent entry of new supply means the industry will struggle to keep up to the steady increase of demand as each of the 200 plus megafactories start to manufacture batteries. As demand puts added stress onto the copper supply chain, supply disruptions are to be expected and can wreak havoc on copper prices. Chile - the world’s largest producer of copper – is often plagued with strike action by miners. The latest supply disruption threat in the copper market came on May 3rd 2021, after Chilean port workers called for a strike action in response to President Sebastián Piñera’s move to block a bill that would have allowed workers to make a third round of early withdrawals from their pension funds.
On the backdrop of concerning supplies and inflation, copper is facing a significant increase in demand due to the electrification of the car industry. Perhaps more accurately, the electrification of everything. Copper is a primary element to the entire electricity supply chain including green energy generation, energy storage and electrical charging.
So while many will label copper as the ‘new oil’ to convey its importance to the success of the electrification of the auto industry, such a label actually understates the critical overall importance being placed on copper in saving the planet. Given the serious supply concerns, this is an ‘all in’ wager we cannot afford to lose.
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