COP, copper, and the green transition

COP, copper, and the green transition

Representatives of more than 190 countries (including 100 heads of state) are descending on Sharm El Sheikh this weekend for the UN’s COP27 climate conference. But progress since last year’s breakthrough agreements at COP26 in Glasgow has been painfully slow. 

The United Nations Environment Program’s recent Emissions Gap Report paints a sobering picture, reporting that only 0.5 billion metric tons have been cut from the 17-billion-ton annual carbon-dioxide deficit that must be closed by 2030 if we are to limit global warming to 1.5 degrees Celsius over pre-industrial levels.

As global economies look to accelerate their rollout of electric vehicles and low-carbon infrastructure, senior figures from both industry and governments have voiced concerns that resource shortfalls could hinder the green transition.

One metal that will be crucial in this respect is copper. Its high conductivity makes it the optimal choice for the wiring, foil, and cables inside electrical systems. No feasible substitutes currently exist, so the production of copper will need to increase drastically to supply this transition from a carbon-intensive energy system to a mineral-intensive one.

Demand drivers

Eighty percent of copper’s uses are linked to its property as a conductor, so it follows that the push to electrify our lifestyle will also lead to a surge in the demand for copper. 

Indeed, a study by S&P Global finds that by 2050, “transition-related applications are expected to boost overall copper demand to about 50 million metric tons from the current 25 million.”

Global sales of electric vehicles (EVs) have already grown threefold in the last three years. By 2025, they are expected to account for roughly a quarter of the global car market. This type of vehicle can use more than three times as much copper as a car with an internal-combustion engine.

Renewable energy installations are even more copper-intensive. An offshore wind farm uses around five times the amount of copper per megawatt needed for hydrocarbon-fueled power plants.

Solar facilities, meanwhile, require more than twice as much copper as conventional power plants. The significance of this fact will not be lost on the European Union legislators who have decided to bring forward the target of doubling European solar capacity from 2030 to 2025. The race to secure copper is on.

All of these factors are likely to lead to a historic copper deficit as consumption spikes. If supply continues at the pace of current recycling and exploration projects, this demand simply cannot not be met.

Supply hurdles

As things stand, the market output of copper is around 25 million metric tons a year. Consultancy Wood Mackenzie recently published a report forecasting that 9.7 million tons of extra annual supply will be needed over the next decade from projects that have not yet been approved (this amount is equal to almost a third of current refined-copper consumption).

“The outcome of our end-use modeling reveals that the likelihood of delivering the copper required to meet future demand shifts from challenging in our base case to improbable in our AET-1.5 (accelerated energy transition) scenario,” the Wood Mackenzie report finds. “In AET-1.5, low-carbon copper demand over the next 20 years would be equivalent to 60% of the current market size.”

Yet supply is hindered by a complex cocktail of regulatory, supply-chain, and organizational hurdles. 

Maximo Pacheco, chairman of Codelco, which is the world’s largest producer of copper, told the Financial Times that it would be up to four years before the Chilean company could reach last year’s output levels. Beset by lower recovery rates, falling ore levels, and dwindling margins, Codelco – which claims to account for 10% of global copper output – is fighting to ramp up its production.

A downturn in the global economy has also proved problematic for global commodities, which are seeing prices fall even as the long-term prognosis for demand grows.

One result of this is that copper stocks at metals exchanges are falling to historic lows. Kostas Bintas, co-head of metals and mining at Trafigura, which is one of the world’s largest copper traders, told the FT that the market currently runs on inventories equivalent to just 4.9 days of global consumption, with the margin expected to drop as low as 2.7 days by the end of the year.

The Russia question

Russia has unwittingly provided a big impetus for the switch to renewable energy sources. Ever since Russian troops crossed the Ukrainian border in February, anxieties about energy security in Europe have been translated into a movement toward renewable energy sources.

Russia’s contribution to the solution of copper shortages adds another intriguing dimension. The world’s largest country is already responsible for around 4% of copper production. But with vast resources yet to be exploited, it has the potential to be a significant force in easing the copper supply dearth.

Already, Russian projects to extract more copper are in the pipeline. Udokan, which is Russia’s largest proven copper deposit and likely one of the three biggest in the world, has not been developed since it was discovered in Soviet times. 

However, Alisher Usmanov’s holdings company USM (also an owner of iron-ore producer Metalloinvest) has announced that exports from the site in Russia’s Far East will begin in 2023. Production volume is likely to be in the region of 135,000 metric tons of copper per year once the facility is completed. 

Given that China consumes around 400,000 metric tons of Russian copper per year, a significant amount of the demand for any new Russian copper projects is likely to come from Russia’s neighbor to the south.

China is one of the world’s biggest copper producers, so Russian imports would free up more of the Chinese output for export to the world, helping to relieve some of the electrification-induced demand in the global economy.

It remains to be seen how many new projects in the scoping and exploration stages will be realized – not just in Russia and China, but around the world. Much depends on investment from companies and governments (which must increase by US$23 billion per year in order to hit the zero-carbon targets set by the Paris Agreement).

Now, more than ever, international cooperation and coherent policies on the red metal are desperately needed.