Red, shiny, conductive, and scarce, Irina Slav on energy

Raise your hands all who are fed up with hearing about a copper shortage. I know I am, and yet the warnings keep flashing — to no avail whatsoever.

Irina Slav on energy

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Red, shiny, conductive, and scarce

IRINA SLAV

JUN 10, 2024

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The outlook for copper has gone from crystal clear to extra-murky in a matter of months. It has, in fact, become a true mystery, because the demand appears to be clearly there but efforts to secure the necessary supply are not forthcoming.

The situation is odd, to say the least, but, as usual, the oddity is on the surface only. In fact, there is a completely rational explanation and it has to do with the irrational. More specifically, it has to do with the irrational ambitions of the climate crusaders. The universe loves irony.

“I genuinely don’t see where all of this copper is going to come from at this point in time.” The statement comes from then new CEO of Anglo American, Duncan Wanblad, who in mid-2022 warned that the world was heading into a serious copper shortage. I dedicated some 2,200 words to gloating over the fact at the time. The strangest thing, however, is that since that warning — and many others — nothing has been done to change the sub-optimal state of affairs.

Of course, one reason is copper prices, which I addressed last year, although I swear it feels like yesterday. Prices, however, are not the only reason. There appears to be a monumental wall of reasons for miners to not be looking for copper growth opportunities and that wall is standing right in the way of trillions in transition investments planned, hoped for, and cherished by politicians, activists and Fatih Birol.

Incidentally, that wall could turn into money for copper investors with that rare quality kids call patience — and I mean copper, not transition investors. Because with or without the transition, copper demand will remain while supply becomes harder to get. The universe really loves irony.

The recent failed merger between BHP and Anglo provides a glimpse at that wall. Ostensibly, the deal fell through because Anglo refused the conditions BHP had attached to its bid, namely to get rid of its platinum and iron ore operations and only leave the copper business because that’s the only business BHP wanted. Kind of like Chevron acquiring Hess primarily for its Guyana stake.

But why would BHP, a mining giant in its own right, want Anglo’s copper business so much? Well, because it was more convenient — and cheaper — to have ready assets than look for new ones, of course, just like they’re doing in the Permian. More than that, however, it was because of that very same copper shortage that Wanblad talked about back in 2022.

There are a lot of differences between hydrocarbons and copper but the most pertinent here is that while there is still an ongoing debate about whether technically recoverable oil and gas reserves in the Earth’s crust are finite or non-finite, with copper there is no debate. Copper is finite. The end. We have a limited supply of it. And we are quite literally running out — if we believe the demand projections.

The BHP-Anglo deal “shows the only way for miners to grow their revenue with copper is through acquisition since no new major copper assets are available. Even if they did exist, it may take up to 20 years to permit and build.”

That’s what Peter Bryant, business consultant and commodity expert, told me when I approached him for comments on the world’s copper situation. Peter is a supporter of an energy transition, by the way. However, he is a sane supporter of an energy transition that will not throw billions more into poverty and make life sadder for pretty much everyone. He is an all-of-the-above kind of person, as long as we try to make energy as clean as we can.

Anyway, Peter’s comments got me thinking even more about the Permian. There’s still loads of oil and gas there. And yet large players would rather acquire smaller ones to get to those loads instead of looking for them on their own — because it’s cheaper and more convenient, and also because the amount of untapped loads is shrinking as is normal. In copper, if I understand correctly, there are even less undiscovered resources that make economic sense to try and discover.

Here is the situation according to one Jefferies metals analyst: “High-grade economic copper resources are not abundant, these things aren’t all over the place, you have to go find them.”

Here it is according to Peter: “New supply through brownfield expansion is challenging due to increasing technical complexities imposed by increased depth and low grades, as well as the distance from plants combined with increasing intensity of energy, water and waste use.”

That last point is particularly interesting in the context of the planet-saving transition because, well, it doesn’t sound very planet-saving to do energy-, water-, and waste-intensive stuff.

There’s more, too. Peter also noted, when I asked about the implications of the BHP-Anglo deal (it hadn’t fallen through at the time), that BHP’s desire to expand in copper via an acquisition revealed a shortage of capital, “both in terms of exploration and new production development, in the mining sector.”

Miners, in other words, don’t have enough money to spend on new exploration and production expansion, at a time when everyone is saying that demand for the metal is going to skyrocket because transition and EVs. If that’s not weird, I don’t know what it. But it actually isn’t weird at all.

Mining has been portrayed as nearly as bad as the oil and gas industry. For years. Naturally, soft-hearted investors have fled, as this FT commentator wrote in a recent column. And those who remained want returns, not larger investments. Returns are in, growth is out.

Normally, it wouldn’t require massive brains to realise that returns and growth go together but here’s the thing about mining — there’s a substantial delay between growth in spending and the resulting higher returns. This delay alone can make the energy transition impossible while making copper investors richer in what I find to be a particularly beautiful twist of irony.

Here’s what I mean. The IEA recently gushed that spending on the transition will hit $2 trillion this year, listing “renewables, electric vehicles, nuclear power, grids, storage, low-emissions fuels, efficiency improvements and heat pumps.” In other words, copper, lots of copper, a bit less copper, a whole damn load of copper, even more copper, and some other non-coppery stuff.

Supply, on the other hand, is not moving much higher… because the International Copper Study Group predicts a surplus — an actual surplus — for this year and next. This year, the surplus will be 162,000 tonnes, on a 2.8% increase in production, shrinking to 94,000 tonnes in 2025 on a production increase of 2.2%. The market, in other words, is rebalancing itself. Clearly, it doesn’t care about long-term demand projections, and neither do investors. Because these long-term projections suggest peak demand growth by 2035. Yes, that soon.

Here’s what Peter told me. “The big challenge is peak demand, starting roughly in 2035, does not last for the life of a major asset so there’s no incentive to build new supply that will only be needed for a fraction of the life of an asset. In short, demand has to flatten.”

2035 is but ten years away. Getting a new copper project up and running, on the other hand, requires something closer to two decades. Indeed, there isn’t much of an incentive for miners to splurge on expansion, even though — and this is the truly puzzling part — they will at some point need to expand in order to maintain current rates of production.

Peter hopes that this consolidation, if it happens, will help miners find new ways to extract copper from ore, citing FreeportMcMoRan’s CEO as predicting copper’s “unconventional moment” — the mining version of the fracking boom. But in the meantime, shareholders want returns, not investments. And they want them now, not in 20 years. Data centres, on the other hand, want power — and copper. And that’s a silver lining.

According to Peter, the rise of AI will help infuse transition efforts with some sanity as more and more supporters realise that you can’t have both AI progress and a transition that makes energy unreliable. He is also optimistic that more of the transition guys and gals will realise the ultimate goal is to have reliable and affordable energy, besides the cleanliness credentials. I myself am not an optimist but I’d love to be wrong.

Copper miners, meanwhile, are biding their time, watching EV sales updates, and waiting to see if the transitioners will live up to promises to make them billions and justify investment in expansion. If you believe the IEA, they will.

“Clean energy investment is setting new records even in challenging economic conditions, highlighting the momentum behind the new global energy economy. For every dollar going to fossil fuels today, almost two dollars are invested in clean energy,” the IEA’s draughty head said with glee in that report I mentioned about 500 words and a century ago.

“The rise in clean energy spending is underpinned by strong economics, by continued cost reductions and by considerations of energy security,” Birol also said. For next report, he might want to check with miners about those cost reductions. Or have a fit over the increasingly inevitable shortage of the ultimate transition metal — especially with all those grid upgrades that absolutely must be made if the transition is to have an actual chance — and with it, the demand growth certainty that miners need to get digging.