In last month’s commentary (The Future is Green) we highlighted that spending on green infrastructure will boost metals demand significantly over the long-term, but are we forgetting the other part of the equation, namely supply?
Spending on green infrastructure could be as significant as the BRIC investment boom of the 2000s. Stimulus packages — such as China’s new five-year plan, Europe’s Green Deal and a planned package for the US — could have a similar impact as the buildout of Chinese infrastructure did in the 2000s. Have metals prices run ahead of the fundamentals and are vulnerable to a correction? Yes, is the simple answer. That said, corrections should provide good buying opportunities amid a new “structural bull market” for industrial metals and favourable trends over the longer-term.
What about the supply-side? Will new supply be available when required given the long lead times to bring new mines into production and given more stringent ESG issues? For example, recently, the US government denied a permit to build the Pebble copper-gold mine project in Alaska citing environmental and indigenous rights. In Europe, the stakeholders that are pushing for a faster energy transition are also, in most cases, against the opening of new mines (there has been huge public objection to proposed lithium mining in Portugal).
Metals such as copper are in a structural bull market and other metals such as nickel, cobalt and lithium will require higher prices to incentivize new supply over the longer-term to meet rising demand. Current price levels for copper and nickel at above $7,000/t and $16,000/t, respectively, if sustained are sufficient to incentivise new mine supply in the medium-term. A number of copper projects have received board approval that will lead to increased mine supply through 2023 (~1.5–2Mt additional capacity) and maintaining a balance in the global market. Beyond 2025 copper and other metals face deepening deficits.
Over the longer-term, mine project development is increasingly challenging, and a supply gap of as much as 8Mt is forecast by industry consultants based on committed copper mine production and potential from uncommitted projects versus primary copper demand. These challenges include:
- Limited inventory of shovel ready projects.
- Copper mine project pipeline is at pre-supercycle lows, according to Glencore.
- Declining head grades, and generally smaller scale/more difficult mining geology relative to history.
- Need to access future resources in more challenging locations, often lacking key infrastructure, and building and maintaining social licence to operate.
Metals are critical to the technologies needed to decarbonise energy consumption and meeting the demand challenge requires:
- Higher metals prices to extend mine lives and unlock currently uneconomic project resources.
- Technologies to lower mining costs and increase recoveries.
- Thrifting of demand through technology/efficiency improvements.
- Thrifting/rationing of demand through higher metals prices.
- Higher rates of recycling to reduce demand for primary metal.
In summary, decarbonising energy requires multiples of current mine supply for most metals akin to the BRIC investment boom of the 2000s. Lower ore grades make mining metals/mineral resources more challenging as well as difficult locations, complex mineralogy, remoteness, lack of infrastructure, and significant social/political challenges to develop an uncommitted mine supply pipeline. As a result, a steepening cash cost curve and high capex requirements mean higher incentive prices are required even with more scrap & substitution assumed.
About the Contributor: Robin Bhar has worked as a metals analyst for over 30 years in several corporate and investment banks in London, most recently at Societe Generale where he was Head of Metals Research from 2012–2019. Prior to that, Robin was a Metals Strategist for Crédit Agricole, providing research and strategy for the bank’s clients and internal trading and sales teams. Prior to CA, Robin worked at UBS and Standard Bank London working with the metals & mining advisory, trading and sales teams. He also has experience at Brandeis Brokers and at Rudolf Wolff & Co. where he began his career. Robin holds an Honours degree in geology and a Master’s in mineral exploration.
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Originally published at https://chaipredict.com on December 8, 2020.
