Just Scatching the Surface. Have a good think!, page-76

linked in previous post, relevant all the same.

https://sprott.com/insights/sprott-energy-transition-materials-monthly-a-new-copper-supercycle-is-emerging/

Extracts

Bans, Tariffs and M&A Rock the Global Metals Market

The U.S. has implemented several targeted bans and tariffs to minimize dependence on foreign imports from Russia and China to reinforce domestic industries. One such measure is the Prohibiting Russian Uranium Imports Act, which bans enriched uranium imports from Russia, with potential waivers until 2028 to address supply concerns. In cooperation with the UK, the U.S. will also ban imports and trade of essential metals like aluminum, nickel, and copper from Russia, which is part of an effort to cut off revenue that supports Russia's military activities in Ukraine. This move directly affects activity on major metal exchanges like the Chicago Mercantile Exchange and the London Metal Exchange.

What’s Driving the New Copper Supercycle?

A new copper supercycle is emerging, built on several rising geopolitical and market trends, including electrification, national security concerns, environmental policy, supply constraints and deglobalization. In combination, these are a powerful catalyst for copper demand.

The prior commodities supercycle that started two decades ago was driven by China rejoining the global economy, leading to mass industrialization and the urbanization of hundreds of millions of people. The current copper supercycle is far more global in reach, has many more demand sectors, and is entwined with the national security of many countries.

The U.S. is increasing tariffs and bans on materials imports to strengthen domestic industries and address security concerns. These measures include higher tariffs on Chinese energy transition-related goods to counter China's dominance in this vital industry. Despite this, China will continue to focus on energy transition, resulting in parallel or duplicate supply chains that draw on the same limited global materials supply. Meanwhile, producers are looking for ways to boost copper output in a market where the ability to grow production is exceptionally challenging.

These factors all point to an exceptionally bullish outlook for copper. Below, we examine the key drivers behind the new copper supercycle.

Structural Shortages

Copper demand is surging due to the global push towards electrification, which covers a wide array of technologies and initiatives. EVs are a major factor—they require about 2.4 times more copper than a traditional car. Renewable energy sources like solar and wind power, which are expanding rapidly, need large quantities of copper for turbines, solar panels and electricity infrastructure. The electrification of public transport systems also fuels the demand for copper.

Meanwhile, supply is not keeping up with demand (see Figure 2A & 2B). Developing a new copper mine is lengthy and expensive, often taking over a decade from exploration to production. These projects increasingly face stringent environmental regulations and community resistance, complicating development in major copper-mining regions. The mining sector has also seen long periods of underinvestment due to the cyclical nature of commodity markets. The long run of low copper prices has meant reduced exploration budgets and fewer discoveries.

As demand ramps up and consistently outstrips supply, sustained higher prices should characterize the copper market.

Figure 2A. Demand for Copper Is Likely to Outstrip Supply
Copper plays a central role in electricity transmission and EVs.

Source: BloombergNEF Transition Metals Outlook 2023. The black line represents supply and the shaded areas represent demand. Demand is based on a net-zero scenario, i.e., global net-zero emissions by 2050 to meet the goals of the Paris Agreement.

Overdependence on M&A

The copper mining industry is focusing on redistributing existing assets through M&A rather than developing new assets. Greenfield projects are expensive and risky, requiring significant capital for exploration, development and regulatory compliance amid fluctuating metal prices. M&A is considered a more cost-effective, quicker, and lower-risk strategy to expand production. It can provide immediate access to proven reserves and existing operational infrastructures, bypassing the delays and uncertainties of new projects. This is especially pertinent in the copper markets, where rapid demand growth makes speed to market essential.

Producers like consolidation because it creates larger mining entities with better economies of scale, lower costs and greater operational efficiency. An integrated supply chain and optimized production processes can give a producer more influence during price negotiations or regulatory challenges. Firms can focus on core competencies, pool resources in areas like extraction and environmental management, and enhance project profitability.

Resource Nationalism

Global macro and policy factors are also key drivers for copper demand. Policies like the U.S. Inflation Reduction Act and the EU’s REPowerEU plan support investment in green technologies and infrastructure. Rapid industrialization in emerging markets escalates copper demand for infrastructure and manufacturing. Trade policy changes (i.e., bans and tariffs), political instability and rising resource nationalism in copper-producing regions can disrupt supply chains and cost structures, leading to price spikes.

Deglobalization and rising geopolitical tensions increase dependence on local supply chains and ramp up military expenditures, spurring copper demand. Copper pricing is also influenced by currency fluctuations—the dollar's value significantly impacts global copper prices. Central banks' monetary policies further affect commodity prices—for example, expansionary policies typically boost copper.

Environmental Concerns

Copper miners face stringent environmental regulations related to land use, pollution control and conservation. These potentially delay new projects. Community opposition and increased awareness of mining's environmental impacts are prompting companies to adopt more sustainable practices. Mining companies are innovating more eco-friendly mining techniques and adhering to ESG principles, which are becoming a prerequisite for attracting investments and securing operational licenses. This, in turn, increases the demand for copper in renewable energy, EVs and energy-efficient construction. Environmental challenges and stringent approval processes for new mines will likely create supply constraints, supporting a long-term bullish outlook for copper prices.

Higher Price Expectations

The recent rebound in copper prices to near new all-time highs suggests the market increasingly recognizes the reality of long-term supply constraints. These are prompting market participants to adjust price expectations upwards in anticipation of tighter supplies against growing demand.

Speculative trading also influences the copper market, adding short-term price volatility as traders react to economic indicators and policy announcements. Given copper's pivotal role in modern technologies and green energy solutions, robust demand and supply fundamentals indicate the potential for a higher price trajectory for copper.

Figure 2B. Visualizing Copper Demand Growth
The cumulative demand for copper to 2050 is greater than the total produced copper over the course of human history.

Sources: ENERGYminute. https://energyminute.ca/infographics/the-volume-of-2050-net-zero-copper-demand/.

Updates on Critical Materials

Copper: Building on Tailwinds

The copper spot price rose 0.21% to $4.50 per pound in May (see Figure 3). Copper mining stocks gained 5.15%, culminating in a total year-to-date rise of 33.79%. Copper junior mining stocks fared similarly, increasing 3.91% in May.

The copper market saw continued momentum in May, building upon the robust tailwinds that emerged in early 2024. Supply disruptions continued to be a primary driver, exacerbating the supply-demand deficit and tightening market conditions. This was evident in the persistent upward trajectory of copper prices and the sharp decline in treatment charges.

Treatment charges, indicative of smelter margins and mine supply tightness, plummeted from over $90 per metric ton to below >$10 per metric ton. This drastic reduction compelled Chinese smelters, responsible for roughly half of global refined copper production, to consider a production cut of around 10%. Zambian smelters faced similar disruptions due to an El Niño-induced power crisis, with electricity rationing by the state power utility putting additional strain on the market.

The month of May also witnessed significant corporate activity as BHP walked away from its bids for Anglo American (see above). This proposed acquisition, aiming to create the world's largest copper producer, underscored the potential for consolidation in the copper sector. Although the deal was not completed, the copper mining space remains ripe for further M&A activity.

These developments, combined with increasing demand driven by AI applications and the energy transition, suggest the copper market is poised for a new supercycle. Expectations of easier monetary policies and a brighter global economic outlook further bolstered confidence in copper's prospects, signaling continued price upside potential in the long term.

GLTA