Copper, Silver and the Green Energy Metals Shortage
Thursday, 7/13/2023 13:03
Not enough silver in the world...?
LIKE SILVER and gold, only less shiny, humans have been digging up copper for 5,000 years,
writes Adrian Ash at BullionVault.
Used in everything from weapons to water-pipes, wiring to roofing and rain gutters, it has been sought after the world over throughout history...
...digging giant holes in the ground that still haven't unearthed enough to sate our demand.
As with the balance of supply and demand for silver, mining supply for copper lagged global demand again last year. Now the 2023 surplus which the International Copper Study Group (ICSG) forecast as recently as last October has now been
flipped into another deficit on the ICSG's latest outlook.
Recycling helps, with scrap metal meeting
around one-third of new use across the last decade.
But the sudden turn towards green-energy technology, most of all the global rush into electric vehicles, means demand is set to surge, outrunning the mining industry's output far into the future on pretty much everyone's forecasts.
That's because a new battery-electric car needs twice if not 3 times as much copper as your dirty old fossil-fuel engine.
"The copper market in 2035 could see a deficit of up to about 1.5 million metric tonnes in the [mining industry's] high-ambition supply scenario," said
a report from analysts at S&P Global last year...
"...and up to a 9.9 million tonne deficit in the rocky-road supply scenario."
Those estimates would equate to between 5% and 38% of current global demand. Which is a lot. But that demand is projected to double between now and 2035 as the green energy drive really takes hold.
Is this big news? Not for the metals industry. Back in 2017, for instance, "It's
a complete game changer," said one commodities economist.
But with the game-changing now well under way, "Copper usage, particularly in China, [already] appears to be
growing faster than previously forecast," reported Reuters this spring, "while mine supply is yet again failing to live up to expectations."
How to fix the green-energy gap? Cobalt, lithium and nickel tend to grab the headlines when it comes to projecting massive demand vs. constrained supply in green-energy metals. Adding copper to their headline, and starting from today's count of 500, management consultants McKinsey reckon the world needs to find, develop and start producing at
200 if not 400 additional mines for those metals by 2030 if we're to have any hope of meeting the Paris climate accord's targets.
No wonder than that analysts and traders see the copper price jumping. That's because, "in theory,
higher prices should encourage project sanctioning and more supply," as Eleni Joannides, research director at commodity-market consultants Wood Mackenzie, recently put it.
But "the conditions for delivering [new mining] projects are challenging, with political, social, and environmental hurdles higher than ever."
Cue still higher price forecasts. Indeed, "I think it's very likely in the next 12 months that
we will see a new high," said Kostas Bintas, co-head of metals and minerals at Trafigura – the commodities trading house which made
$7 billion in profit last year – at the
Financial Times' raw materials summit in Switzerland this March.
Touching $10,845 per tonne amid Russia's invasion of Ukraine in March 2022, copper could now reach $12,000 per tonne in 2023, Bintas said, a level also targeted by analysts at giant US bank Goldman Sachs.
And beyond that? Well...
"What's the price of something the whole world needs but we don't have any of?"
"The electric car industry is
turning copper into gold," says UK economics journalist Ed Conway.
If true, that would be great news for copper miners and owners. Because from its peak a decade ago, copper has
lost over one-third in real terms, as our chart above shows. Whereas
gold is currently just 20% off its inflation-adjusted month-average top of 2011...
...a ratio which would, by the way, put today's silver price in Dollars at $45 per Troy ounce, rather than mid-2023's level of $24, some 60% below its own 2011 top.
Like gold and silver of course, copper is one of "the most crucial substances in human history"
as Conway explains in his excellent new book,
Material World.
Alongside the other stuff Conway digs into...such basics as sand, salt, iron, oil and lithium...copper "built our world and will transform our future.
"But most of us take [it] completely for granted."
Hence the shock and awe we all face if higher prices really are required to pull all the extra supply we need out of the ground.
So what about the outlook for silver?
"Changes to solar panel technology are accelerating demand for silver," says Bloomberg...
"...a phenomenon that's
widening a supply deficit for the metal with little additional mine production on the horizon."
What's the story?
Shinier and more conductive than any other metal, silver found 11% of its physical end-use demand coming from the solar power sector last year.
But that's likely to rise in 2023, rising towards
solar taking 15% of total silver demand on the best estimates, thanks to a switch among solar power generators to installing so-called 'n-type' cells...
...a more efficient form of the technology now seeing rapid adoption which currently needs slightly higher silver loadings per unit.
Add this to the longer-term boom in solar-energy plants worldwide, and by 2025 "we expect [solar] demand for silver to make up 53% of total demand," says a new note from Australasian bank ANZ.
"This will place increasing pressure on supplies," ANZ goes...
...something already forecast last year to mean "uninterrupted deficits [set to] persist beyond 2022" by expert analysts Metals Focus...
...because growth in silver mine production "is largely beholden to other metals projects."
You see, silver is mostly a "by-product" of mining for other metals...most of all lead, zinc, copper and gold in that order...rather than being the sought-after metal itself.
In fact, less than 28% of last year's global mining output came from primary silver projects
according to the expert data gathered, compiled and analyzed by Metals Focus for the Washington-based Silver Institute.
So unless the price of lead, zinc, copper and gold are also rising and driving new mining exploration and expansion, that is sure to dull any supply-side response to rising silver prices from the diggers and drillers.
And amid this move to relentless markets deficit, here comes the government of Mexico – silver's No.1 mining nation – shouting 'Someone hold my cerveza!'
"Mining companies are
rethinking investments in Mexico, the world's biggest silver producer, after the government pushed through sweeping regulatory changes," explains the
Financial Times.
"The country's mining body Camimex has warned the legal reforms could jeopardise $9bn of investment in the next two years while stymying the development of Mexico's vast resources for clean energy technology."
Last year President Andrés Manuel López Obrador (AMLO for short) nationalized the lithium reserves beneath Mexico's soil, much to the annoyance (and cost) of Chinese producer Ganfeng, which had paid over US$400 million for the Sonora project in western Mexico.
Now AMLO has "halted awarding new mining concessions"...while forcing developers to bid against each other through a government-run auction...and also reserving all rights to mining exploration "for the Mexican state" as Armando Ortega, chair of the mining committee of the Canadian Chamber of Commerce in Mexico, puts it.
Canadian firms represent 70% of all foreign-owned operations in Mexico's total mining sector, which employs over 2.3 million people. So this latest turn to old-skool 'resource nationalism' is "causing diplomatic tensions" as it very likely breaches Mexico's obligations under the US-Mexico-Canada free trade agreement and the Trans-Pacific Partnership.
Such "political instability...is clearly going to have an impact in the investment decisions of all members of the industry, in the short, medium and long term...
"...[hurting] the people that the government wants to help the most," says Jorge Ganoza, CEO of Fortuna Silver Mines, now spending US$350m since 2011 on the San Jose silver and gold mine in the southern state of Oaxaca.
How all this will play out, who can say today?
But short-term, note that silver output from the precious metal's No.2 miner Peru has already fallen 7% year-over-year on the latest data...
...hit by the
same violent protests (apparently over the lack of trickle-down to local infrastructure spending from the government's big mining concession tax take) which have already
cut 2% off copper mining supply worldwide (and which the Peruvian government is
now deploying the army to guard against).
Further ahead, and as with AMLO's resource nationalism, mining bosses say Peru's own mineral rights' bureaucracy is threatening any growth in global copper output. The paperwork demanded by Lima can double the average time it takes to get permitted and started compared to the rest of the world, says one, running from 10-15 years.
So buy copper, buy silver, and hope for a global supply crunch, right?
First, beware the forecasts.
Bloomberg's latest silver demand story, for instance, cites
an academic paper which reckons that, by 2050, the world's entire proven reserves of unmined silver will be dug up and swallowed by the PV solar-panel sector alone...
...a massive half-million tonnes.
That might well be right. But total annual demand right now is barely 30,000 tonnes (a record in itself, by the way). So that forecast, whilst no doubt built on thorough and honest specialist analysis, really does seem heroic, to say the least.
Second, any such forecasts around the green-energy revolution assume that the political drive to turn the world electric will somehow find both the money and the public acceptance to make it happen.
Again, that might prove true. But it's meeting a lot of resistance to date, and against the 2050 target for 'net zero' carbon emissions, the world is
laughably if not hysterically behind the curve.
Third, and most notably, the green-energy industry knows that copper and silver supplies are constrained. It also knows that those metals can represent a huge chunk of total expenditure when building and selling a new battery car or a new solar farm project...
So thrifting continues, with scientists around the world working to reduce if not cut the quantity of silver needed to produce a Watt of power per hour even further from the 90% reduction already made since the silver price hit a 4-decade peak of $50 per Troy ounce in 2011.
Indeed, that research paper which forecasts solar-panel demand will eat the world's entire underground silver reserves by 2050 in fact focuses on exploring and explaining new research into thrifting or expelling silver from new solar panels...
...targeting "silver-lean and silver-free metallisation approaches including copper plating and screen-printing of aluminium and copper."
So to be clear, yes. The underlying trend in green-energy tech looks very much to be the silver investor's friend. But if you believe that supply-demand deficits must always prove bullish for prices – something on which
the jury is still out by the way, as our chart of the market's response above suggests – then you must also accept that the cure for high prices is high prices, whether by boosting supply or slashing demand or a combination of both.
From here to net zero remains a hard and uncertain road, in short. The resulting path to substantially higher silver prices looks sure to follow.
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