NewsCopper Industry Expected to Grow After Pandemic Slowdown

Copper Industry Expected to Grow After Pandemic Slowdown

Degrading copper ores have been a significant issue for operators globally. Despite the increasing efficiency of operators, copper supply is expected to remain in slowdown in the coming years. Stakeholders in the industry have pointed toward the scarcity of ores as a significant reason behind the existing challenges in the industry.

With the adoption of electric vehicles, increased use of renewable energy sources, and infrastructure investments, the global demand for copper has increased. However, the supply of copper has not been able to keep up with its rising demand over the past ten years, primarily due to underinvestment in this sector. This has resulted in sluggish growth across the entire sector.

However, the trend is expected to change with significantly higher capital finding its way towards projects for increasing copper production. Despite efforts to boost production and the reserve base, the copper material supply is likely to remain in deficit until at least 2025. Considering the hike in copper prices and anticipated demand across industries, mining corporations are looking to align capital strategies that will help them in striking a balance between market competitiveness and expanding the reserve base through investments in exploration activities.

According to Dubai Investment Fund (DIF) research, for important markets including the US, Australia, Japan, and Canada, overall investments in sustainable sectors rose by 34%. DIF is a leading Middle-eastern Investment Initiative focused on providing insights to institutions and investors worldwide.

Sustainability is being viewed as the top priority for mining companies. Key leaders of this industry are investing on the basis of their own environmental, social, and governance (ESG) targets and strict government regulations. Capital allocation in this sector is becoming increasingly ESG compliant so that investors can continue to manage sustainable portfolios.

Challenges in Enhancing Supply

The International Energy Agency (IEA), in 2021, sounded the warning bell on the global mineral supply, particularly copper. Its supply had still not caught up with the surge in global demand.

“Today’s supply and investment plans for many critical minerals fall well short of what is needed to support an accelerated deployment of solar panels, wind turbines, and electric vehicles,” IEA Executive Directive Faith Birol wrote.

Most of the minerals are produced by a very small number of corporations in a small number of jurisdictions. Together, Chile and Peru are responsible for 40% of the global production of copper. Escondida in Chile, which is the biggest copper mine in the world, is believed to have reached its peak production. The Chilean government has threatened to shut down the mine—57.5% of which is owned by BHP—for its water usage, while a strike by workers has further disrupted production.

Similar to gold, there are fewer and fewer significant copper resources being found, and as costs climb, the time between discovery and production has grown longer. A total of 224 copper deposits were discovered between 1990 and 2019. Of these 224, only 16 have been discovered in the past decade. The majority of these new deposits are of low grade, despite the fact that copper is still abundant on the earth’s surface. On the other hand, Goldman Sachs has predicted copper demand will grow nearly 600% to 5.4 million tons by 2030. All these problems are putting additional pressure on the supply of copper globally.

Commodity Price Growth

According to JPMorgan Chase & Co., commodities could surge by 40%, reaching record levels, if investors increase their allocation to raw materials during a period of growing inflation. Commodities have seen a record rise as Russia’s invasion of Ukraine shook markets and drove up the price of everything, from oil to wheat. Due to the existing high level of global inflation and the Federal Reserve’s stronger response, investors are considering redistributing the weighting of stocks, bonds, and raw materials in their portfolios.

“In the current juncture, where the need for inflation hedges is more elevated, it is conceivable to see longer-term commodity allocations eventually rising above 1% of total financial assets globally, surpassing the previous highs,” the JPMorgan strategists wrote in April 2022. They further wrote that this “would imply another 30% to 40% upside for commodities from here.”

Goldman Sachs Group Inc. has warned in a note that a global copper shock was underway.

Sustainable Efforts for Increasing Global Reserves

According to DIF, during the past decade, global copper reserves have shown a consistent growth at a CAGR of 3.3%, in line with 3.7% CAGR growth in exploration budgets. In contrast to the typical incentive price range of $7,000 to $8,000/t for new project developments, the average price between 2010 and 20 was $6,726/t. However, despite the lower price range, only a few significant miners made opportunistic investments to increase reserves and acquire operational copper assets so as to ensure long-term sustainability.

Major copper producers invested $41 billion in acquisitions and exploration during the past ten years, adding 168 Metric Tons of copper to the global reserve base. Strong demand projections and consistent price increases are all major factors that have attracted investors to expand their market positioning and increase asset purchasing.

In general, climate change policy measures like the adoption of electric vehicles, the production of renewable energy, and green infrastructure will maintain copper demand, requiring copper businesses to increase investments to maintain market share and clientele.

Securing Underground Deposits and Low-Grade Copper

Finding and securing new deposits is a major challenge and this further complicates the problem of ore scarcity. This has forced miners to adopt practical and economical strategies for increasing ore extraction from low-grade deposits. Although the leaching procedure has assisted miners in lowering the cut-off grades, its advantages are limited. Miners are exerting far more pressure on technology developers to promote the creation and wide-scale use of copper extraction technologies.

In order to continue deploying its catalytic method for generating copper from low-grade deposits, Jetti Resources, for instance, recently raised an additional $50 million in financing from a series C funding. These innovative techniques might increase mine viability and mine life.

As the grade declines, miners are increasingly investing in underground operations to boost output. Even though underground operations have greater production costs, most miners see a long-term benefit from them. Some significant copper producers are aggressively pursuing these reserves to increase production.

Additionally, Codelco is attempting to convert Chuquicamata’s open pit into an underground mine. The Chuquicamata underground mine, which was officially opened in 2019, is anticipated to produce 320,000 tpa of copper by 2026 and increase mine life by at least 40 years.

Increased Focus on ESG Integration

DIF reports that ESG considerations will have a growing impact on how the mining industry develops in the future. Although it is widely accepted that a transition to net-zero will occur by 2050 (or sooner), external stakeholders are beginning to have a greater impact on how ambitiously mining corporations handle a variety of ESG-related issues. With the key focus on sustainability across the value chain by leading investors, mining operations are expected to transition to align with ESG targets. As a result of ambitious climate targets, governments have been compelled to act and implement carbon abatement strategies. Additionally, investors are increasingly vigilant in maintaining a sustainable portfolio through ESG-based investing, encouraging businesses to take ESG compliance into account.

Reducing Emissions and Energy Consumption

The copper industry is traditionally a high emissions industry, particularly for underground mining operations. In comparison to open-cut operations, which emit 2.3t CO2 eq/t Cu on average, underground activities emit 3.5t CO2 eq/t Cu on average, which is 50% more greenhouse gas emissions. The difficulty of achieving sustainability goals is exacerbated by emissions that are higher even in open-cut operations than those of industries like steel, where an average of 1.8t CO2/t steel is generated.

While the average energy required for copper mining has decreased to 22 GJ/t Cu, it is still higher than that of other metals like steel, which averages 20 GJ/t. Miners are searching for more energy-efficient solutions as a result of declining ore grades and growing extraction complexity.

Improving Sustainability Metrics in the Copper Industry

Currently, copper miners are putting a major effort into enhancing several sustainability-related metrics. The key areas in which miners’ investments have expanded during 2020 are community development, waste and water management, health and safety, and sustainability and climate change. However, miners still need to enhance their focus on innovative business models and shift to green financing alternatives.

Steps for Miners to Steer the Transition

The International Copper Association (ICA) has been a leading authority in addressing sustainability and environmental issues in the copper sector. It has taken several initiatives aligned with Sustainable Development Goals to address sustainability challenges faced by the industry. The group has developed a clear criterion to assess businesses that are doing well in terms of sustainability. The business’s methodology has combined globally recognized criteria and given the sector a platform to transition to sustainable production.

The Copper Mark, an assurance mechanism for ethical copper manufacturing, was developed in 2019 by ICA. It attempts to evaluate the performance of miners on different sustainability metrics and assist investors in making judgments about sustainably produced copper. Instead of creating a brand-new copper-specific standard, it acknowledges the ones already in place in the industry and creates a reliable assurance system for miners.

Reassessing the Business Model to Meet Increasing Demand

To guarantee future volume offtake, miners are increasingly entering into offtake agreements with final consumers and physical commodity merchants. For instance, offtake agreements for phase one copper output from the Kamoa-Kakula mine in the Democratic Republic of the Congo were inked by CITIC Metal and Zijin Mining in June 2021. The two businesses will be in charge of shipment to the location as well as paying a $300m upfront payment. 2020 saw the signing of an offtake deal by Excelsior Mining to sell 100% of its copper cathode production from its Gunnison copper project to a Swiss commodity trading company. As demand rises and prices remain unpredictable, the agreements are anticipated to expand.

Increased ESG measures will initially result in higher capital requirements but will be beneficial in the long run. Additionally, these measures could give miners a chance to model finance activities to raise money for greener initiatives. Polymetal raised a green loan worth $125 million to finance projects aimed at transitioning to sustainable operations. In a deal brokered by the Spanish bank BBVA, Atlantic Copper raised a green credit for $21 million to fund six environmentally friendly projects.

Copper Expected to Sustain Bullish Run with High Demand

DIF anticipates a sustained bullish outlook for the copper industry with increasing demand requirements. As copper continues to be a crucial component of the energy revolution, the optimistic demand outlook for the metal is forcing miners to reevaluate their exploration budgets. Additionally, reorienting business plans to emphasize sustainability will result in greater ESG compliance for continuing operations. To create solutions with great economies of scale and improved productivity, a digital road plan is essential. A gradual shift to more sustainable operations will be enabled by cooperative efforts to conduct research, development, and implementation of new technologies, all the while retaining profitability and long-term competitiveness.

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