Thriving Copper Market Faces Looming Supply Shortfalls and Demand Challenges

The copper market is currently experiencing bullish predictions, driven by robust prices and soaring demand in recent years, leading to substantial profits for copper mining companies. However, the market is facing a critical issue – the scarcity of copper.

The scarcity is mainly attributed to a lack of major discoveries and new mines, coupled with declining production at existing mines. As a result, governments and boards are increasingly concerned about potential supply shortfalls. With the average lead time for developing a new copper mine exceeding a decade, users of copper are now seeking immediate solutions to avert a potential supply crunch.

In light of these concerns, BMO Capital Markets has released an in-depth report examining the impact of “thrifting” and substitution on copper demand. This issue has become a central topic of discussion within the industry.

BMO’s report indicates that without further substitution or thrifting, copper semis demand could reach an impressive 40.4 million tonnes per year by 2030. This forecast represents a substantial increase from 31.8 million tonnes last year, with a projected compound growth rate of 3% between 2022 and 2030.

To address potential supply constraints, original equipment manufacturers have already initiated programs to use less copper or substitute it entirely in various sectors. These sectors include electricity transmission and distribution networks, renewable generation capacity, communication cables, industrial air conditioning units, and the transport industry.

BMO’s base case scenario anticipates a potential elimination of nearly 10 million tonnes of cumulative copper semis demand by 2030 through a steady and incremental adoption of thrifting and substitution, which should positively impact commodity prices.

However, there is a growing concern among experts about “fear substitution,” whereby consumers are proactively designing around potential supply constraints. This fear-driven substitution, particularly prevalent in the automotive sector, poses a significant challenge to the longer-term demand outlook, potentially impacting industry volumes and prices.

Under a more aggressive “fear” scenario, BMO suggests an additional 11.6 million tonnes of copper demand may be at risk, leading to a cumulative total of 21.5 million tonnes by the end of the decade. This would result in annual demand of 35.2 million tonnes in 2030, representing a lower compound annual growth rate of 1.2% compared to the base case scenario’s 3%.

One possible substitution to copper is aluminum, which is currently four times cheaper than copper. Although aluminum has only around 60% of copper’s conductivity, its lighter weight makes it an attractive alternative in various applications.

Industries such as electricity transmission, fiber optic communications networks, and renewable generation projects may adopt thrifting practices, reducing the overall copper intensity in these applications. Additionally, in the electric vehicle sector, efforts to reduce copper usage through advancements in battery technology and power systems are already underway.

Despite the potential for substitution and thrifting, BMO remains optimistic about the long-term prospects for copper. Even in a scenario with minimum demand and maximum substitution, the copper market is still expected to experience positive growth, including in non-energy transition related areas like construction. Nevertheless, the future of Chinese property demand remains a crucial consideration in assessing potential structural decline risks in the copper market.