Copper Prices Are Imperiling Electrification And Decarbonization

Copper is the wiring connecting the present and future. It is also the global markets’ latest runaway. The growing supply-demand gap for copper is increasing volatility in markets to the point that buyers are seeking to secure long-term deals due to increased concerns about its availability. Copper prices have surged since they hit a low point in March 2020 as COVID hit. Low copper prices (58% decline from 2010 to 2016) helped spur and sustain investments and research in renewables, but they also reduced incentives for many copper manufacturers, including Broken Hill Proprietary, Freeport-McMoran, Glencore, and Southern Copper, to increase production levels. High copper prices could constrain electrification, including for transport, and emerging technologies, such as renewables.

If this was any other commodity there would be no mystery. A pandemic-induced demand slump resulted in an underinvestment in production, so when demand rebounded producers were ill-equipped to handle new orders, resulting in higher prices. For copper, it’s not so simple.

There are two problems. Firstly, there has been increased investment in research and development of creating synthetic alternatives for copper which should help stabilize prices even if the power conversion efficiency of synthetic copper is still less than desired. Secondly, copper production is comparatively easy to ramp up and has already done so, with little impact on prices. The real reason copper is shooting up in price can be distilled down to one key point: copper is directly linked with energy infrastructure and future energy developments.

As we should know from high school physics and chemistry, copper is an incredibly efficient conductor of electricity and heat, making it vital for nearly every piece of infrastructure or electrical device from cables to generators to electric engines. It is used across industries in everything from cars to aircraft to computers. This unmatched utility has helped increase supply and demand. Over the past 30 years, copper production increased by 124%. Yet, this is less than half of the value of production increases of competing commodities aluminum and iron, totaling 256% and 257% respectively.

Rising energy costs have hit the energy-intensive copper mining and refining industries hard. Increasing crude oil and natural gas prices have increased copper’s cost of production. Further complicating matters, the very same increasing energy costs are leading to an increase in the demand for copper as alternative energy technologies including wind, solar and electric vehicles are becoming more prominent. This increase in the demand cycle is further magnified by foreign competition from emerging markets, both for building energy infrastructure, increased consumer spending for cars, planes, and gadgets, and the growth in the production of all things electric.

A key player in the copper market driving up demand is China. It consumes 40-50% of newly mined copper annually, even when supply increases, and is the home of copper giants like Jiangxi Copper and the Zijin Mining Group which are active across the world. China’s economic growth, especially its post-pandemic rebound, correlates with current copper prices measured via the “Li Keqiang Index”. Industrial metals such as aluminum and copper generally tend to show the strongest correlations with the Li Keqiang Index which measures growth in the Chinese economy. With increased market demand in China post-pandemic as observed in the Index, copper prices have moved in a similar direction.

China is consuming copper at quantities and prices higher than normal market conditions would dictate because China sees copper consumption and investment in energy infrastructure as a political project and another aspect of Sino-American rivalry. It is determined to become the indispensable actor in every facet of the international energy supply chain, and copper is just another arena this is playing out in.

Increasing copper prices are a key sign of the viability and progress of decarbonization, electric vehicle production, and so much more. After the woes of inflation and pandemic-era logistical bottlenecks are fully shaken off, copper prices could see a decrease in volatility and a return to more stable levels. But make no mistake, the era of naturally cheap copper is over unless steps are taken to systematically increase supply – or cheap and viable substitutes are found. As copper demand is expected to double by 2030, the industry hopes for corporate planning to concurrently increase supply. Environmental overregulation in the developed world will allow China to increase its leadership in copper production.

Copper has been mined and utilized by humans since the Bronze Age, and its recent woes should remind us that even high-tech post-industrial societies require stable primary product inputs which are interconnected in ways we seldom consider. The Biden administration and the EU should make every effort to increase domestic and friend-shored production of copper to ensure stable and low prices. If environmentalists oppose copper mining in the US and the West, they are embracing a self-defeating strategy that will not only hand China the tools required to dictate humanity’s further electrification and decarbonization strategies but also slow and damage the adoption of green technologies everywhere. Embracing responsible copper production is a small price to pay for electrification and decarbonization.