Copper pipeline far from overflowing: Wood Mackenzie

A Wood Mackenzie report that suggests investment in new copper production is running at a quarter of the levels needed to sustain an accelerated global energy transition says development hurdles are “higher than ever”.

The firm says geopolitical uncertainties and immature policy environments have contributed to mining project approval rates retreating to cyclical lows.

“In the first half of 2022 the volume of committed copper projects totalled an average annual production of 260,000 tonnes per annum,” it says. “This is well below the one million tonnes per annum required to meet requirements for an accelerated energy transition – and this despite copper prices having been at their highest for a decade.”

Wood Mackenzie says up to 17Mt of annual copper production is “in theory” in the global development pipeline. However, poor underlying economics and/or a range of infrastructure constraints could mean the volume of copper coming through the pipeline in the near term might shrink to just 2.5Mt.

“In theory, higher prices should encourage project sanctioning and more supply. However, the conditions for delivering projects are challenging, with political, social and environmental hurdles higher than ever,” it says.

This is certainly not helping cost inflation.

“The investment needed to produce a tonne of copper has been rising steadily. The current inflationary environment is one reason, but a more fundamental change is grade decline,” Wood Mackenzie says.

“The cost of producing a tonne of copper has increased, and projects need to scale up to improve economics, raising the initial capital cost. This means that the list of potential developers is limited to those that can afford the multi-billion-dollar upfront cost.

“Assuming an average capital intensity of the project pipeline and taking into account the volume of copper required to achieve climate targets, we estimate that more than US$23 billion a year will be needed over 30 years to deliver new projects. This is a level of investment only previously seen for a limited period from 2012 to 2016, at the back end of the China-induced commodity super-cycle.

“This combination of cost pressures, together with the larger volumes required from an accelerated energy transition, has implications for the industry incentive price.

“This will underpin a copper price rally to more than US$11,000/t [about US$5/lb] within five years, in contrast to US$7,010/t (US$3.18/lb) over the same period in our base case.”

Wood Mackenzie says the $23b-a-year investment level is 64% higher than the average annual spend over the past 30 years.

It suggests the copper sector’s relatively favourable carbon footprint, compared with other “future-facing” metals, could be a silver lining, particularly if widespread carbon taxes are introduced.

“On average, the carbon dioxide emissions from producing copper cathode are a quarter of those of refined aluminium, a potential substitute in certain applications. Furthermore, 70% of copper mine emissions are classified as Scope 2, or relating to power generation. This is something an accelerated energy transition would hope to address by shifting to renewables, significantly reducing the overall carbon intensity of supply,” the firm says.

“The premise that copper demand will benefit from the energy transition has already evolved from opportunity to reality.

“Global EV sales have grown three-fold in three years.

“Government subsidies in China, the US and Europe have also helped to support greater market penetration. Plants that will provide the copper foil for batteries are being developed apace across Asia, North America and Europe. At least 1Mtpa of electrodeposited copper foil manufacturing capacity announcements were made last year alone. These are scheduled for completion over the next few years to meet anticipated demand.

“Close to 80% of copper’s use is related to its property as an electrical conductor.

“Consequently, future growth in global electricity demand as economies develop will also drive growth in copper consumption.

“However, the use of copper for EVs and renewable power generation is significantly more intensive than in their fossil-fuelled equivalents.

“Together with the related build-out of electrical networks, this compounds future expected demand for the metal.”

 

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