Megatrends: could copper hold the key to energy transition?

The war in Ukraine has brought energy security to the top of the agenda. Having addressed the immediate shortfall, Western governments are actively looking at alternative means to provide cheap, clean, and secure energy for their economies, with the hope that renewables can fill the hole left by Russian oil and gas. To facilitate this transition, the world’s natural resources will have to be tapped. This will bring its own set of problems that governments and companies will have to resolve, but it could create some opportunities for investors.

The mineral intensity of the energy transition can be seen in the application of copper. Because it is used so widely, the price of copper often provides an early indication of the health of the world economy, earning it the nickname ‘Dr Copper’. Looking forward, it is likely to become even more important as it experiences structural demand from the energy transition.

As shown in the graph below, in 2020, demand from renewables totalled 5.8 megatonnes or 24% of total copper demand. The International Energy Agency (IEA) expects renewables demand to almost double by 2030, reaching 10.8 megatonnes or 36% of total demand¹.

One reason for this increased demand is electric vehicles (EV). The copper required to produce an EV is four times that of your conventional petrol or diesel-powered car. With EV penetration forecast to increase drastically ─ the IEA predicts the EV stock will rise to 145 million by 2030, 13 times the current fleet of EVs² ─ copper consumption is likely to surge.

Copper will also be a crucial input to renewable infrastructure. The amount of copper required to produce a megawatt of onshore wind energy is two and a half times that of a gas-powered plant; for offshore wind and solar energy it is seven and a half times and two times, respectively³. To achieve the IEA’s net-zero scenario (designed to show what is needed for the world to achieve net-zero emissions by 2050), solar power generation will need to grow by 800% and wind power by 397%⁴.

Copper is not the only commodity that will be important in energy transition. Lithium and nickel are used in batteries, while cobalt and rare earths, such as neodymium, are used to make magnets for wind turbines and other types of infrastructure. These materials are expected to be used at a far greater pace as this decade progresses. For example, lithium demand is forecast to increase at a 10% compound annual growth rate (CAGR) between now and 2030 to fulfil growing battery demand⁵.

Commodities work on a supply and demand basis. With demand set to boom, will the supply side be able to keep up? We are not so sure.

The consensus expectation amongst economists is for slower global growth in 2023, leading some commodities analysts to forecast a period of oversupply in the copper market. This could lead to some near-term weakness in prices. But from 2024 onwards, this is expected to shift to a long-term supply deficit. By 2030, the deficit is expected to be about six megatonnes⁶, which represents approximately 30% of annual production.

It is also possible that copper and other commodities suffer from unforeseen supply shocks caused by economic or political instability in mining locations, such as China, Indonesia, and Chile.

All these factors point towards ongoing volatility on the supply side of the market. The risk for the global economy is that this could slow the pace of transition. But with higher demand and supply taking time to adjust, we expect to see prices rise.

Investors can help facilitate the energy transition by allocating capital to where it’s needed. We believe one area that will require an increasing amount as we move through this decade is the mining sector.

Although copper may not be as exciting as other options, it has a crucial role in electrification. It is also less likely to be substituted out of the production process as technology advances.

As we think about how we can position portfolios for the megatrends, it’s essential to look across the value chain to identify investments most exposed to these structural trends. A good place to start could be at the bottom — with the copper miners.

Sources:

¹ IEA, ‘The Role of Critical Minerals in Clean Energy Transitions’, May 2021

² IEA, ‘Global EV Outlook 2021’, April 2021

³ IEA, ‘The Role of Critical Minerals in Clean Energy Transitions’, May 2021

⁴ IEA, ‘Renewables’, Fuels & Technologies, December 2022

⁵ IEA, ‘The Role of Critical Minerals in Clean Energy Transitions’, May 2021

⁶ Citi, Evelyn Partners

⁷ Anders, R., ‘Copper Discoveries – declining trend continues’, S&P Market Intelligence, June 2022

⁸ OZ Minerals, January 2023