Odd Lots: Why Copper May Be One of the Tightest Markets The World Has Ever Seen

• Could be conservative, copper will need to go to a level beyond any level seen before
• Oil went up 7x in 2000s to adjust market, solve imbalances 
• Do not rule out $50,000 or $100,000 a tonne copper
• Have never been in such an extreme set of fundamental circumstances in copper mkt

• Weakness in Chinese demand due to covid lock downs
• Slightly stronger exports of copper out of Russia vs. expectations
• These are transitory issues

• There is no decarbonization without copper
• Integral to key green technologies – EVs, EV charging infrastructure, Renewables
• Demand impact from decarb over next decade will generate as much of an uplift to Copper demand as China did in the 2000s
• At the same time, we hit peak copper supply in next 2 years
  • There is an absence of new investment
  • After that peak, supply is trending towards open ended contraction

• Demand destruction to achieve rebalancing
• Copper is a small part of the price of any end good
  • Ex. Copper is a small part of overall price of an EV
• Would need massive increases in price to achieve necessary increase in overall cost to drive demand destruction 
  • Very different to agriculture, energy markets

Lack of Fresh Investment

• No shortage of copper in earth’s crust
• There are potential, mineable options out there but capital is not flowing to these projects
• Very different vs. 2000s 
  • In 2000s, there was a supply side respond to the increase in demand
  • Supply and demand increased in lock-step
  • This time that is not happening at all – no new copper mine approved in last 2 years even as prices have doubled
• #1 constraint – the experience of the last cycle
  • The mining industry faced near death experience as a result of the overbuild in response to high prices in mid/late 2000s
  • Management in the mining sector is taking a much more conservative approach now
• Another difference – ESG influence
  • Less capital flowing into commodities sectors (dont screen well thru ESG filter)
  • Higher ESG hurdles for new projects
    • For a new mine you will need 2-3 years to get the right permits to move forward (was only 6-12 months 20 years ago)
    • Chile is Saudi Arabia of copper market, permitting process has tripled in length
• Lack of Talent
  • Young people no longer going into mining sector
  • Not enough engineers to support a new project (practical bottlenecks)

Outlook for new mines:

• Next 12 months: final spurt of growth set to come through
  • A small number of projects in Chile, Peru and the Copperbelt in Africa
• Then we hit peak production at end of ’23, Q1 ’24
• Open ended contraction of ~1% per year from 2025 onwards
• Pretty set in stone
• What changes this?
  • Price – realization that copper is absolutely a key material for transition, will become a decarbonization bottleneck

New production technology?

• Nothing similar to Shale breakthrough that will dramatically change supply
• Some marginal developments around achieving higher returns from tailings deposits
• marginal production gain, nothing along the lines of shale