Copper is increasingly one of the global economy’s prized assets. The red metal’s prowess as a conductor of electricity means demand is likely to soar over the next few decades as the world shifts from fossil fuels to more renewable forms of energy. It is also the main rationale for BHP’s (BHP.AX) attempted $46 billion takeover of rival Anglo American (AAL.L). But there’s a striking disconnect between the attractive big picture, and how hard it is for private sector players to make money by mining copper.
It is easy to see why BHP boss Mike Henry wants to hike the $156 billion group’s exposure to copper. The primary way to slash the world's reliance on fossil fuels, which currently account for 80% of its global energy needs, is to massively scale up its use of electric vehicles, wind turbines and batteries. These all require metals that can cost-effectively conduct electricity after being stretched into wires — in other words, copper.
Opinions differ over how much annual global demand needs to rise from 2023’s 26 million tonnes. The International Energy Agency reckons this figure will have to reach up to 41 million tonnes by 2050; S&P Global analysts pencil in as much as 53 million tonnes. What is clear is that at some point, and especially after 2030, a chasm will open up between supply and demand. S&P puts the shortfall at as much as 9.9 million tonnes a year by 2035.
Faced with this scenario, it might be reasonable to expect that copper prices would be surging, and that miners would be falling over themselves to both expand existing “brownfield” mines while simultaneously digging up new “greenfield” sites. At around $10,500 a tonne, the price of copper for delivery in three months’ time is indeed as high as it has been in two decades. But world copper mine production is set to grow by only 0.5% in 2024, the International Copper Study Group reckons, partly because a dispute between the Panamanian government and Canada’s First Quantum Minerals (FM.TO) has shuttered the Cobre Panamá mine. That’s well below the 2.6% average rate of growth in the previous three years, and also below its initial forecast for expansion of 3.7% this year.
Miners are also grappling with spiralling overheads. One issue is that operating costs have spiked. Pandemic-inflated energy bills meant that miners’ average operating expenditure rose from around $3,100 a tonne to $3,600 between 2020 and 2023, the IEA says. A bigger problem is the rising cost of building new mines, or even expanding existing ones. The IEA reckons that in 2017 it cost about $20,000 per tonne of new production to mine a new segment of a brownfield site. That’s now $30,000 per tonne, and other sources cite $35,000.
While energy bills have already fallen back, capex inflation looks harder to reverse. On brownfield sites miners literally have to dig deeper to get at new deposits, having already extracted the stuff that is easier to get at. Lower-yielding ores mean miners have to dig up a greater volume of earth to extract the same amount of metal. Panamá-style spats with governments, which want to grab indigenous riches for themselves, also push up the expense and risk.
To make the numbers work, copper prices therefore need to rise even higher. Miners require prices of $5 a pound — or $11,020 a tonne — just to hit their costs of capital on new projects, one investor told Breakingviews. When the copper price was at $8,500 for much of 2023, signing off on new investment implied making economic losses. BHP and $126 billion Rio Tinto (RIO.L), (RIO.AX) have a very good reason to avoid disappointing their shareholders, after presiding over $87 billion of collective writedowns from dodgy M&A since 2007, JPMorgan analysts estimate.
Sector leaders like Henry and Anglo CEO Duncan Wanblad know all this. That’s one reason why BHP is not rushing to accelerate the next phase of its giant Escondida copper mine in Chile, and why $78 billion Freeport-McMoRan (FCX.N) has held back from expanding its Bagdad site in the United States. Meanwhile, Goldman Sachs analysts calculate that recent copper M&A deals have been struck at the equivalent of $25,300 per tonne of annual output — cheaper than the IEA’s estimate for the cost of building out some brownfield copper sites.
This sort of reasoning explains BHP’s pursuit of Anglo, and the prevailing chatter in mining circles of “buy over build”. But the broader benefits of consolidation are far from clear. As Barrick Gold Chief Executive Mark Bristow recently pointed out, one miner buying another does not ensure the newly enlarged company will produce more than the previous two. Given that miners always retain the option of pausing supply to protect their margins, a bigger group might even dig up less than two smaller ones. Whether Wanblad breaks up Anglo under his own steam, or Henry does it instead, neither is likely to move any faster on capital spending than the commodity price outlook suggests.
The more positive view is that bigger miners will find it easier to manage inflated capex costs. At $30,000 a tonne, a mine capable of producing 500,000 tonnes a year would cost $15 billion. That’s itself less than half the yearly output of BHP’s Escondida. If mining companies are going to get anywhere near the 9.6 million tonnes a year of new capacity consultant CRU Group reckons is needed by 2035, they will need to be as big as possible to take on the risk of a mega-project encountering delays or other setbacks.
That might still not be enough of a sure thing for the likes of BHP, though. Investors may feel copper does not warrant prices of $15,000 a tonne, because they expect governments will fall short of their energy transition ambitions. Another possibility is that exorbitant prices would prompt a shift from copper to aluminium, which trades at only $2,600 a tonne. Wanblad, Henry and other mining leaders at least have a hedge of sorts. If copper’s dysfunctional market leads to a shortfall and red metal prices rise beyond current levels, their shareholders might still gain. It’s less clear that the planet will benefit.
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CONTEXT NEWS
The prices of critical minerals fell sharply in 2023, returning to levels last seen before the pandemic, according to the International Energy Agency’s Global Critical Minerals Outlook 2024 published on May 17.
Materials used to make batteries suffered particularly significant decreases, with the price of lithium dropping by 75% and the prices of cobalt, nickel and graphite falling by between 30% and 45%. These declines were mostly driven by a strong increase in global supply – helping to offset the steep price rises in 2021 and 2022.
The IEA said investment in mining of critical minerals grew by 10% and exploration spending rose by 15% in 2023, slower than in the previous year.
Detailed analysis suggests that announced projects are sufficient to meet only 70% of copper and 50% of lithium requirements in 2035 in a scenario in which countries worldwide meet their national climate goals.
