The energy transition is heralding the start of the next super-cycle given the scale of demand from metal intensive renewable energy generation, storage, and electric vehicles.
This is according to a recent report by metals and mining consultancy group, Wood Mackenzie. As such, the next decade continues to present a unique opportunity for ‘green energy’ commodities such as copper and cobalt.
According to the report, the last supercycle was driven by China’s infrastructure and industrialisation build out and ran for around a decade. The next supercycle will be multi-decade in duration as it will take that long for the world to wrap its arms around the challenge of achieving net-zero carbon emissions and it will consume vast quantities of base and critical metals such as copper and cobalt to do so.
Increase in copper mining activity on the cards
Copper, amongst many other commodities, has enjoyed a rapid recovery over the past year, initially on the back of a quick rise in consumption in China, and more recently strong demand in other key copper consuming economies such as the US and Europe. Supply disruptions over this period provided further impetus, as did investor enthusiasm on the back of copper’s relative medium to longer term demand prospects that will result from the decarbonisation of the global economy.
The strong rebound in demand growth this year, together with a modest supply response, will result in a deficit and will underpin high prices. However, the upward momentum in prices over the past 18 months looks set to stall over the next few years as the legacy of the last period of high prices back in 2017, which led to a high volume of projects being sanctioned, is now coming into fruition.
As above average mine supply growth of close to 5% exceeds that of consumption over the 2022 – 2024 period, Wood Mackenzie anticipate several years of surplus and as a result, rising inventories in terms of days of consumption will see copper prices under pressure once again. It will only be once stocks start to decline and deficits emerge that prices are expected to recover from the 2025 annual average low.
While a green driven, post pandemic recovery will underpin copper’s prospects over the medium term, some of this demand will be met by a rising share of direct use of scrap, driven by the flurry of high-quality scrap fed copper foil investments that are emerging to support demand from EV battery manufacturers.
The report states that even though copper prices are expected to trend lower from 2022, a further two years of annual average prices above a long-term incentive price could encourage more mining projects to be advanced to help meet some of the requirements that are set to emerge.
Beyond 2025, an anticipated shortfall in global copper supply will emerge as the pace of supply growth slows relative to demand. Prices are expected to trade higher in reaction to these anticipated deficits and as accumulated inventories are drawn down and consumed. This should provide sufficient confidence to encourage producers to reopen closed mines and undertake incremental expansions, mine life extensions and eventually develop projects that are needed to maintain a reasonable long-term market balance.
DRC operations will impact cobalt prices
Ongoing tightness in the intermediates market has been compounded in 2021 by several factors, including pandemic-related restrictions, container shortages and civil unrest in South Africa. The continued tightness has kept payables for cobalt at high levels. According to the report’s calculations, with prevailing spot metal prices, payables have averaged over 85% since April of this year. This compares with an average of 65% in 2019 and 70% over 2020. While demand for metal remains relatively weak still, higher production costs and increased usage of briquettes and broken cathodes by sulphate producers has kept the spot market tight and prices at healthy levels.
Despite strong demand growth, it is expected that prices for cobalt will be lower during the 2023 – 2026 period. With Mutanda mine in the Democratic Republic of Congo (DRC) confirmed to come back online, it is expected that there will be substantial surpluses over this period. In addition, the ramp up of other DRC operations like the Tenke Fungurume expansion and Mutoshi and increasing output from the new HPAL operations in Indonesia will keep the cobalt market comfortably supplied.
Beyond 2027 the rapid uplift in EV sales will quickly plunge the market into steadily increasing deficits. While the addition of new Indonesian projects and CMOC’s Kisanfu development in the DRC have increased the pipeline of probable and possible projects, longer term demand looks challenging to meet. By 2030, it is expected that the deficit will rise to around 20% of demand. Given timescales required to bring on new mine supply, it is clear more investment is needed in the near term if EVs are to have any hope of becoming ‘mass market’ over the next decade.