1. Systematic grade decline and resource depletion.Primary output from currently operating mines is reportedly likely to decline over the coming decade. This is due to the long-anticipated decline in grade that is endemic to the porphyry resource base that currently dominates global supply. That is a geological fact.
The implication is that new mines will have to be developed to offset this decline and to meet rising demand.Our view is that this will be no easy or inexpensive matter.
2. Lack of big bang exploration success.Global copper mine output is currently built on a foundation of giant deposits with low operating costs that were discovered and developed decades ago (between the 1960s and 2000s across the globe).
Analysis shows that Tier-I discoveries across the minerals sphere have become scarce in the new millennium, with an additional slowdown post GFC. Copper is no exception. Our view is that it is extremely likely that the copper cost curve will steepen in the 2020s, as the absence of a significant new generation of Tier-I assets will leave lower quality and/or higher cost deposits to fill the looming gap.
3. Above ground risk.The only region where the rate of metals discoveries increased in the 2000s over the preceding decade was Sub-Saharan Africa, where above ground risk is relatively high.
Above ground risk has been shown to act as a curb on exploration success. A recent study by the International Monetary Fund concluded that improvements in political risk are a powerful driver of the rate of metal discoveries.
If the most prospective areas for copper exploration now are in regions where above ground risk is materially higher, on a weighted basis, than in the 1980s and 1990s, then it is likely the probability of discoveries is now much lower, and the probability of developing what is discovered has also fallen.
4. Water constraints.According to the CSIRO, around 1600 litres of water is required to produce the copper used in a conventional internal combustion engine vehicle. Regions that are either arid or are projected to suffer high water stress and are also important copper producing regions, include the Atacama region of Latin America; the south west of the United States; Central Asia and southern Africa.
Desalination plants can help provide water security for individual operations, but they require large capital outlay to install and considerable energy to run. Where desalination solutions are not pursued, competing with other commercial users and the broader community for resources in water scarce regions can be extremely challenging.
5. Rational market dynamics.The copper mining industry has shown itself to be a relatively rational dynamic engine when under stress. The 90th percentile on the cash cost curve has served as an effective floor for copper prices during cyclical downturns. Copper prices bounced off the 90th percentile in the recent downturn, illustrating that even in a world of zero interest rates, with sticky supply evident in a number of other commodities, dynamic rationality was the order of the day in copper.
6. Chinese consumers.The increasing importance of household consumption in the Chinese economy should provide a boost to copper demand across a range of end-use sectors. While the residents of China’s Tier-I and Tier-II cities are already established in an urban consumer lifestyle, residents of lower tier cities and the ~47% of the population still residing in the countryside, have a great deal further to go in this regard.
7. India rising.The development trajectory of India is expected to be a major boon for copper demand. India’s urban consumers are decades behind their Chinese counterparts in terms of all key end-use sectors important to copper (with the exception of televisions).
8. The electrification of energy demand.Our projections assume that the demand for electricity will outstrip the growth in total primary energy demand between now and mid-century. The production, distribution and transmission of all that power will require a great deal of copper.
9. The electrification of transport.The mega-trend within the mega-trend. As a battery powered electric vehicle (EV) contains four times as much copper as a conventional medium sized car (around 80 kg versus around 20 kg), the red metal is expected to be a big winner from the electrification of the light duty vehicle fleet.
10. Wind and solar.From a copper point of view, the per megawatt hour demand coefficient associated with offshore wind generation is almost five times that associated with coal generation. For solar, the coefficient is around two and a half.
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