Copper Shortages and the Transition to Green Energy

Copper, as a chemical element, is one of the most important because it is especially good at conducting heat and electricity, relative to other metals. It has multiple functions, including its use in industrial machinery and electronic equipment or as a raw material in the development and evolution of clean energies. Copper deficit for 2023 has already been announced, and it also symbolizes a period of crisis for plenty of projects and industries. The cause is an evident increase in demand and a severe supply constraint.

Supply-side factors

Most of the world’s suppliers are concentrated in Latin America, where the 10 most important mines are located: Chile (3), Peru (3) and Mexico (1). Unfortunately, a series of recent events have led to a shortage in the supply of copper. In fact, problematical political situations in some of these countries have exacerbated the current deficit. Some of them are:

• PERU: It represents 10% of the world's copper supply.  

As a consequence of the dismissal of Pedro Castillo for declaring the dissolution of the congress and the state of emergency, some unrest occurred in the last few months, affecting about 30% of copper production.

These are the main mines located in Peru:

- Antamina: It is the largest copper deposit in Peru and represents almost 20% of national production. In 2021, an indefinite suspension of operations was declared due to unrest caused by peasant communities blocking access to the facilities.

- Glencore's Antapaccay: This copper mine has been attacked several times in the first month of 2023 and protesters are demanding the cessation of the mine's operations. As a result, the mine temporarily halted its operations.

- MMG's Las Bambas: The mining company has halted and slowed down copper production due to transportation blockages, as in previous occasions what has been generated is an accumulation of production without being able to dispose of it.

• CHILE: The major supplier. It represents 27% of the world copper supply.

Increasing environmental regulation has raised production costs in the mining industry and raised barriers to expansion, as happened with the Dominga mining megaproject due to its environmental impact.

Indeed, companies such as BHP Group, Antofagasta PLC y Freeport-McMoRan Inc. have postponed major investments in this business.

• MEXICO: The same stance was adopted. Strict environmental mining regulations have stalled up to 25 major projects by freezing new mining concessions and taking a tougher line on the processing of environmental permits.

Therefore, the main causes of the supply constraints are regulatory concerns about their environmental impact and logistic problems related to the capacity to transport supplies (road blockades and protests) and the chaos generated by the protests, which has forced the suspension or interruption of mining companies’ activities.

In addition, during the first week of February, the operations of First Quantum Minerals, which operated in Panama and is considered one of the largest mines in Latin America, were suspended. The inconveniences this time were caused by disagreements with the Panamanian government in the payment of royalties and taxes.

Demand-side factors

The lack of balance between supply and demand is also due to the simultaneous increase in copper consumption in China, driven by a growth in its economic expansion, and its reopening of the market after the pandemic period. China is the world's largest copper consumer and has increased its demand due to the large investments and infrastructure projects that are on the way. 

Along the same lines is the global project to move towards a green energy transition. In accordance with the 2030 Agenda for Sustainable Development (SGD), adopted by the member states of the United Nations and the goals set for 2050, a series of projects have been launched to achieve an efficient energy transition. In light of this planned transiation, copper has become an essential resource as it is essential for the replacement of fossil fuel-based power systems with renewable energy sources.

Therefore, the energy transition has led to a huge demand for copper. Indeed, annual demand will double to 50 million tons by 2035, raising the concern that shortages could result in a reversal of the course of the energy transition. This been seen already in industries such as  as construction, manufacturing, architecture. Additionally, the automotive sector’s ability to produce electric vehicles on a large scale will be especially hindered by such shortages. 

Summary 

The halt in production in the world's main copper-producing regions has exacerbated the impact of increasing demand for copper. Cash-settlement prices for copper listed on the London Metal Exchange (LME) show a rapid increase in copper prices from $5,965 to $8,387 in the period between end of year 2018 to end of year 2022.So far this quarter the LME’s copper cash-settlements peaked at  $9.436 on January 18. Experts predict that the price will remain above US$8,500 per tonne for the next few years, with the risk of even exceeding US$10,000.

Unfortunately, a similar situation may occur with other relevant minerals such as lithium and cobalt. In fact, copper experience will be a clear reference for other raw materials in order to find an effective solution.

In the end, it is all about balancing the dilemma between the environmental, social and governance (ESG) practices that are the main challenges of mining and increasing copper production to supply key sectors of the green transition and the economy.

All in all, the supply of copper will be substantially impaired by the following factors: 

• Copper is a necessary element in many manufacturing and construction industries, added to the growing demand in renewable energy projects that use this element as part of the transition.

• The demand for copper from high consuming countries such as China will cause the supply and demand balance to become more unbalanced if a controlled supply solution is not found.

• The lack of consensus between the private sector, the public sector and communities around mining will maintain the constant blockades and protests in the main copper-supplying cities in Latin America.

• Environmental regulation is increasingly relevant for the development of the mining activity but has become a barrier to its operation.

• The cessation of activities of the main mining companies abruptly generates a deficit in the copper supply, which has a direct impact on the price of copper, given the scarcity situation, expanding the damage caused by the initial problem.