By Oliver Slack

Recent geo-political instability has reminded us of the volatility of global markets for fossil fuels. Russia’s invasion of the Donbas in February 2022 sparked an acute energy crisis across Europe, and the risk of an escalation to the Gaza conflict continues to raise concerns about the security of Western supplies of crude oil and natural gas. As such, the impetus for energy security amongst politicians has never been stronger. The European Union, for example, has announced ambitious plans that champion a focus on renewables and decarbonisation, using rhetoric that equivocates sources of renewable energy as “freedom energies”. 

However, European efforts at securing “freedom” through decarbonisation may face a significant obstacle. There are growing concerns that a lack of investment in the mining industry could significantly slow down global decarbonization efforts. In particular, the world’s largest copper producers have warned that there may not be sufficient supply and/or infrastructure to adequately support this green transition. 

The demand for base metals such as copper is set to increase significantly to support global decarbonisation efforts. Sometimes dubbed as the ‘metal of electrification’, copper boasts almost unmatched electrical and thermal conductivity. It is a key component in electric motors, batteries, and wiring, making it essential for electric vehicles and EV charging stations (up to 83 kg of copper is required to produce electric vehicles in comparison to 8-45 kg for cars with internal combustion engines). The increased demand for copper is also closely linked to the push for renewable energy projects and the transition to greener energy sources. Renewable energy technologies heavily rely on copper, with a single 3-megawatt (MW) wind turbine for example requiring up to 4.7 tonnes of the metal and offshore wind farms regularly using in the region of 9.5 tonnes of copper per MW of generation capacity. Finally, copper production will have to meet the growing demand driven by infrastructure development projects. These projects will be particularly resource-intensive for emerging economies in the Global South, given that according to Anglo-American, the average Westerner requires 200-250 kg of copper per person, compared with a global average of 60kg. 

Projections from both the S&P and McKinsey & Co. forecast a substantial surge in global copper demand, with a sizeable shortfall predicted by the start of the next decade. These figures underscore the need for new large-scale mining projects to ensure robust supply chains. However, executives in both the mining and investment industries have expressed growing concerns about the ability of copper producers to meet this escalating demand. They point to several factors holding back supply chains and explain that such issues could cause delays in the green transition. 

Firstly, mining firms are faced with practical geological supply issues, as copper is becoming increasingly scarce in substantial quantities underground. Since the most easily accessible and high-grade deposits have already been processed, copper order grades have fallen significantly over the past several decades from 1% to less than 0.6% according to Resource Capital Funds. Mining corporations are therefore faced with an increase in upfront costs by having to work at deeper levels and research new projects to find and extract deposits of high-quality copper ore. 

However, an even more pressing concern for global supply chains arises from the economic instability and political uncertainty confronting mining companies. These corporations are having to navigate an economic landscape in which the weakness of the global economy and cost inflation have contributed to falling metal prices; despite relatively robust performance in the early months of 2024 copper prices are still unlikely to return any time soon to their 2022 peak at close to 10,500 USD. These prices and a generally poor macroeconomic outlook have disincentivized investment, making it difficult for mining executives to secure financing for increasingly risky new projects. Indeed, Marex’s head of market analytics Guy Wolf has gone as far as to argue at a 2023 conference in Switzerland that copper prices would need to rise to 15,000 USD to attract substantial investment in new mines. 

A lack of support and trust from investors is perhaps symptomatic of a general stigma surrounding the mining industry. According to the Financial Times, many investors are still wary of the sector because of its inherently cyclical nature and “since the industry squandered billions of dollars on ambitious projects and takeovers during the commodities boom to feed the rise of China during the 2000s''. Valuation multiples are low for mining companies and show a lack of investor support for financing new projects. For example, BHP, Rio Tinto, Glencore, Anglo America and Vale have an average PE ratio of 8.5, low compared to the 18.5 average in the S&P500. According to Hambro, this represents a “massive gap in valuation” and something that could impact mining corporation’s abilities to finance important new assets. 

Finally, political uncertainty in key mining jurisdictions further dampens financial confidence. In 2023, Glencore announced that it was suspending its operations in its Antapaccay copper mine located in Peru after political protestors looted and set fire to its premises. This is significant as the South American nation at that point accounted for more than 10% of the world’s copper supply. Similarly, Chile – the world’s largest copper producer accounting for 27% of global supply – has been forecasted by Goldman Sachs to produce less copper from 2023 to 2025. Other major copper producers such as China, The Democratic Republic of Congo, Indonesia, and Mongolia also contend with political and regulatory uncertainties that affect market dynamics and investment decisions in the copper industry. 

Therefore, whilst it is perhaps hyperbolic to suggest that the world is facing a copper crisis, the mining industry is without doubt under pressure to meet rising demand over the next two decades and will need significant support from investors and government institutions. Indeed, some commentators have even gone as far as to say that the inclusion of mining corporations into Environmental, Social and Governance (ESG) frameworks will be a step in allowing these companies to supply the raw materials for the green transition.