Editor's Note: At Stratfor, we use geopolitics to understand the constraints and advantages that geography confers on a country and the political, technological and economic decisions it compels. The exercise, taken to its logical conclusion, can extend all the way down to an atomic level. This occasional series examines the elements and the power that various combinations of protons, neutrons and electrons can exert on the world around us. In the latest installment, we look at copper.
Copper was one of the first metals tamed by the human race; people were using it for decorative objects, tools and weapons as early as 4500 B.C. in Mesopotamia. In modern society, the element is necessary for construction materials, electricity transmission and transportation. That means it can serve as a fairly reliable gauge of economic growth, with demand indicating how much effort a country or region is putting into industrialization and urbanization.
As the uses of copper evolve, the countries and regions that produce the raw material have the potential to exploit it for their own gain. Technological developments, including the expansion of the electric vehicle fleet, and economic growth in areas of the world with large populations could alter supply chains, providing new market opportunities for producers.
The world's transportation sector is slowly moving away from fossil fuels and toward new sustainable energy types. This will necessitate the use of more copper, which, in addition to being used for electricity and construction purposes, is required for the production of electric vehicles and their batteries.
A New Kind of Vehicle
The transition from gasoline- and diesel-powered engines to battery-powered motors may be slow, but it's not going to stop, meaning copper will remain a necessary metal for at least the next several decades. Electric vehicles require two to three times the amount of copper as a traditional vehicle, since the element is used in the car's battery, the permanent magnet for its motors and wiring, various inverters and any additional electrical distribution infrastructure. Over the past year, several countries have announced policy shifts to promote the use of electric vehicles. And as their use increases, the international demand for copper is likely to rise.
Of course, estimates of future demand vary depending on levels of optimism about the how fast the world will move through its energy evolution. But forecasts about electric vehicle use are increasingly positive, as innovations in the development of the vehicles bring down their price point and as countries begin implementing policies that favor those vehicles or eliminate internal combustion engines.
The International Copper Association estimates that the demand for the metal for electric vehicles will rise to 1.74 million metric tons by 2027; that figure is currently at 185,000 metric tons. Energy research consultancy Wood Mackenzie is more cautious, expecting that number to reach 1.6 million metric tons by 2035. And according to global investment manager Aegon Asset Management, if electric vehicles make up 34 percent of the global vehicle fleet by 2040, that development would lead to an estimated 2.66 million metric tons of extra copper demand.
However, there is a limit to the impact these increases can have. Global copper demand is currently sitting at roughly 24 million metric tons, with the vast majority going to electrical and electronic products, construction materials and traditional transportation equipment. Thus, even in a world where 100 percent of vehicles are electric, the current copper demand would only increase by 22 percent.
That means that though electric vehicle demand has the potential to exacerbate or magnify a supply-and-demand imbalance in the global copper market (which may face a deficit in the coming years), the sector will not realistically make up a high enough percentage of overall demand to force the metal's key producers to radically change their behavior in the next couple of decades.
Dominating New and Traditional Demand
When it comes to copper demand overall, China will be the key country to watch. With its high population, infrastructure expansion and economic growth, its need for electricity and construction materials dictates that it dominate the traditional market for copper. Moreover, China is becoming an increasingly influential country in the electric vehicle market. Currently, it uses roughly half of the world's copper for general population needs, domestic construction projects and its massive Belt and Road Initiative. Now that it is embarking on several Made in China 2025 initiatives, which will involve the development of smart factories, electric vehicles and an internet of things, China will continue to dominate global demand in the near term.
Across the Himalayas, India's large population and rapid economic growth and urbanization mean the country will also continue to demand large amounts of copper, at least in the medium term. The fractured country is committed to its efforts to improve electricity access to its still agrarian population and promote the country's manufacturing sectors.
Uphill Geopolitical Battles for Suppliers
As demand steadily increases due to traditional copper needs and the electric vehicle bump, political and practical issues within several copper-producing countries on the supplier end could result in a deficit in the next couple of years.
According to analysts for commodity research firm CRU, the price of copper needs to be at $6,614 per metric ton to support government and private industry pushes for the exploration of new sites (greenfield exploration) and expansion of existing facilities (brownfield exploration). And though copper ended 2017 above $7,000 per metric ton, analysts are attributing a fall to just over $6000 in mid-July to the ongoing uncertainty around U.S. trade policy. If this uncertainty remains, it could exacerbate an expected deficit issue for the meta. Major exporters such as Chile are already starting to feel the impact of lower prices. Ivanhoe Mines Ltd. projects that the supply deficit could be as high as 5.7 million metric tons by 2030. Other analysts also anticipate growing deficits in the mid-to-late 2020s; BMO Capital Markets predicts a deficit of nearly 1 million metric tons in the international copper market by 2021 or 2022.
Moreover, the quality of the metal from some of the world's top producing countries — Chile and Peru — has been declining as many of their older mining sites reach the end of their life. As these traditional exporters work to expand their production capacity, they will face growing environmental constraints. (This goes for Australia as well.)
Much like it has done with other commodities involved in the global energy transition away from oil and gas, Chile will use its business-friendly environment to take advantage of changes in global copper demand. However, as water scarcity becomes a more pervasive problem in the country, Chileans may start to push back against the government's efforts to expand mining operations. The electricity demands of mining and processing will also put a growing strain on Chile's grid in the near term, and the country will subsequently try to make up for that deficit by expanding both traditional and renewable capacity.
Peru's political environment also remains business-friendly, despite some nationalistic rhetoric in past campaigns. And its mining sector benefits from Chinese investment as well. However, there is already popular opposition to mining projects due to concerns about resource scarcity. Indigenous roadblocks and other protest methods have yet to affect government policy, but as resources become more scarce, mining projects will likely face bigger and more organized opposition efforts from locals who fear they will suffer all the negative impacts of production while reaping few of the benefits.
In Africa, the Democratic Republic of the Congo and Zambia are the continent's two largest copper producers. And in the decades to come, both will try to expand their raw material extraction and value-add industries. In the Congo, operators will continue to face an uncertain political environment, as well as onerous tax and regulatory policies. This could affect the country's ability to take advantage of rising demand, because companies may be unwilling to invest. But since the country has a stranglehold on the production of cobalt, which is mined alongside copper, many investors may still pursue copper projects despite political uncertainties.
In Zambia, there is a dispute between the government and mining company Quantum Minerals Corp. over taxes. But the increasingly authoritarian politics of President Edgar Lungu are manifesting as a focus on social control rather than economic nationalism, which means mining operations have not yet been threatened. However, as mining companies push to expand over the next five years, his government could start to seek increased control of resources. Lungu, who won re-election in 2016, is already seeking to adjust his country's constitution to ensure his ability to run for a third term in 2021.
Finally, much of the world's undeveloped and undiscovered copper reserves lie in Central Asia. Mongolia, in particular, is poised to benefit from mining company Rio Tinto's planned expansion of the Oyu Tolgoi mine on the country's Chinese border. However, the project has been plagued by disputes between the Mongolian government and mining heavyweight Rio Tinto. Landlocked between the two great powers of Russia and China and cursed with an inhospitable landscape, Mongolia was dealt a fairly inconvenient geopolitical hand. Since it has such limited options for promoting its own economic growth, the government, which has a 34 percent stake in the Oyu Tolgoi operation, is working hard to ensure it can benefit as much as possible from any deals related to the resource it does have, such as copper.
Secondary Copper Steps Up
Ultimately, electric vehicles do not have enough market power to drive a major expansion in copper production over the next five years. And a possible deficit in production opens up the opportunity for refiners to use recycling and alternative extraction methods, such as solvent extraction and electrowinning.
Copper is one of the few metals whose performance qualities do not decrease after recycling. There are two indicators used to measure recycling's contribution to overall global consumption: RIR (recycling input rate), or how much of total copper consumption comes from recycling, and end of life recycle rate, or the percentage of theoretically available copper that is produced. Both indicators have remained relatively consistent for the past 50 years or so, even as copper demand increased.
Refiners in Southeast Asia and India are best poised to take advantage of additional demand as the world starts turning to secondary copper during the next decade. Though China is currently the largest consumer of global copper scrap, in April 2018 it enacted an import ban on Category 7 copper scrap (including coiled copper and waste motors), which will go into effect by 2019. This will increase the amount of available scrap for recycling at an international level. Southeast Asian refiners in Vietnam, Indonesia, Malaysia, Myanmar and Laos, as well as India, have all been named by industry exports as potential alternative refining locations.
As the world moves to new forms of energy and as metals such as lithium and cobalt become superstars, the copper market will not see the same dramatic changes. Its traditional uses will continue to dominate, but increased use in new technologies like electric vehicles will exacerbate deficits and potentially support recycling and alternative extraction. The slow and steady increase in demand doesn't diminish its role or importance in the future of energy, but it does mean that copper producers will be less responsive to the shifting energy landscape and are unlikely to invest in massive new projects because of it.