If China’s not buyin’ — its price ain’t flyin’…
That might as well be the unofficial phrase for every mineral related to renewable resources these days. China China China…
They’re either cranking out refined products. Or they’re hoovering up raw materials to produce them.
Like it or not, when you talk about the transition to renewable energy China may be the most important player in the world.
But China aside, the transition to renewables depends on something else as well…
The Most Important Metal in the World?
Copper…
Copper can easily be considered THE most important metal when it comes to the renewable (electrification) revolution.
Chemically, copper is second only to silver when it comes to conductivity. And given that silver costs around $25 an ounce while copper is under $4 per pound, the choice for wiring the grid is a no brainer.
Underground cabling is almost all copper. Its conductive efficiency means it actually requires less energy to produce energy!
And when it comes to renewable energy, specifically solar and wind, the demand for copper goes into overdrive.
According to Visual Capitalist, photovoltaic solar systems require about 5 metric tons of copper per installed megawatt. Onshore wind farms require 4.3 metric tons. And offshore wind demands 9.6 metric tons!
EVs use 4-times the amount of copper as their internal combustion cousins.
And copper is used to produce semiconductors, circuit boards, electromagnets, heat sinks and fire sprinkler systems…
The Tylers at ZeroHedge put a point on it:
Copper is considered an essential metal for renewables. The metal is highly conductive, can easily be shaped into pipes, wires, or sheets, and can remove heat far more rapidly than other metals. In fact, copper itself is a sustainable material. The metal is 100% recyclable and can be used repeatedly without any loss of performance.
So what happens when the most important player steps into the ring with the most important metal?
The China/Copper Boom of 2020
According to Erik Norland, Chief Economist at the CME Group:
Each year China buys about 40%-50% of the newly mined copper. Some of raw copper is used domestically, while much of it is re-exported in the components of intermediate or finished goods. The pace of growth in China’s manufacturing sector has often correlated strongly both to the current price of copper as well as copper prices three to five quarters in advance.
Their copper demand extended well beyond EV and green needs into their real estate sector which has been a key driver of economic growth in the country.
Taking a quick look at the chart below, it’s easy to identify the last big copper price boom from mid-2020 into 2022.
Source: Daily Metal Prices
Norland continues:
Having dipped sharply early in the pandemic, China’s pace of growth rebounded strongly in the second half of 2020 and the first half of 2021. Copper prices followed this rebound closely. Since then, the pace of China’s industrial growth has slowed significantly.
And so did the price of copper.
Since the bounce into January 2023, copper prices have been sideways to lower on weaker economic numbers out of China. Their real estate industry had become overdeveloped and slowed dramatically. And that tapped the brakes on the economy as a whole. (Prices made another run at their previous highs this year, but couldn’t muster the momentum to follow through.)
So it would be easy enough to predict that when China starts to rev its economic engine again, copper prices will likely start moving higher as well.
But there’s another development that could kick copper prices into overdrive.
Ore Grades Are Dropping
If China is the biggest consumer of copper worldwide, Chile is the biggest producer.
And recently they’ve been facing a problem. According to the International Energy Agency (IEA)…
…average copper ore grades in Chile have declined by 30% in the last 15 years. Since Chile’s mines produce more than one-fourth of the world’s copper, these falling ore grades could be a cause for concern—especially with a deficit looming over the market for refined copper.
Foundation Capital’s Brandon Beylo has noted that ore grades have declined from around 0.90% to about 0.60%.
Lower ore grades means less copper coming out of the ground.
This is obviously significant.
China has still been relatively quiet in the market.
But when (not if) they recover their appetite for copper, its price could reverse to the upside dramatically, not only reaching previous highs, but taking them out.
And that’s something to keep an eye on…
