Record copper prices threaten global energy transition

Disruptions in the supply chain, which marked the first months of the cholera epidemic, cast a long shadow. A.D. After the reopening of the global economy in the second half of 2020, there was a sharp decline in the number of industries.

Commodity prices rise. Crude oil, timber, and essential metals, such as copper and aluminum, have had a negative impact on various sectors that depend on these commodities as their prices rise for many years.

Copper Price Increases Renewable Margins

In particular, the clean energy sector has seen its margins narrowed. While renewable energy technologies are more competitive when oil prices are high, the sector is highly dependent on metals, including copper, as they hit higher prices earlier this year.

Copper, one of the best carriers of electricity, is widely used in the production of electric vehicles, wind turbines and solar panels. Overseas wind farms require 9.6 metric tons of copper per megawatt of capacity, especially copper, due to their extensive cables. Offshore wind farms and solar photovoltaic (PV) are also highly copper-dependent, requiring 4.3 tons and 5 tons of copper per megawatt, respectively.

Each of these renewable energy technologies is projected to grow rapidly over the next three decades, and the copper market will fall under significant pressure, which will have a detrimental effect on investors in the renewable sector. In fact, the increase in copper prices is already damaging the edges on many clean energy projects.

Norwegian oil and gas company Ekonor (formerly Statoil) – now the main developer of wind farms – has begun to reduce investors’ expectations of their renewable projects. The company recently fell its lead from 6-10% in 2020 to 4-8% this year. Denmark’s Erst A / S (formerly Dong Energy), the world’s largest offshore wind farm developer, has returned 11% to 7.5% in labor capital in the first quarter of 2020. Danish competitor Vestas Wind Systems’ returns fell from 17.4% to 12.2% during the same period.

If this trend is not controlled, many renewable projects may not be financially viable except for large companies with deep pockets.

Healing for high prices

Do copper supply barriers hinder energy transfer in infancy? There is concern about the impending copper shortage. Citigrop estimates that by 2021, the global copper market will be depleted by 521,000 metric tons, with only the risk of sinking as the green transition accelerates. Analysts warn that the copper industry will have to invest more than $ 100 billion to avoid the annual supply deficit of 4.7 million metric tons. Such a large gap will undoubtedly increase copper prices and continue to erode margins on renewable projects.

However, there is an old adage, “Healing is high for high prices.” High prices are a cycle of commodity markets because they stimulate investment. Finally, the new investments will increase commodity prices and reduce commodity prices. If prices fall sharply, then the investment dries up and eventually turns into a deficit – completing the cycle.

With oil prices rising by more than $ 100 a barrel, once unforeseen projects suddenly became more attractive and investment in the oil industry began. A shale oil explosion occurred and several major oil projects were implemented.

Also, the copper shortage that sent the price hike has caused short-term pain, but there is a silver lining – high copper prices are once leading to a turnaround in projects that could not be financially viable.

Hot supply from Udocan and Kodelco could change the game

Take, for example, Russia’s largest untapped copper stockpile and the world’s third-largest Udocan deposit. Although Udokan has an estimated 26.7 million tons of copper reserves, it has not been built since its discovery in 1949 due to technological and logistical challenges in exploiting the remote site near Lake Baikal.

For decades, Udokan deposits have been the biggest obstacle to mining, raising the cost of technical challenges to the economy. As the desire to grow the project grows, economic risks hinder investors. High copper prices and strong demand growth in the coming decades, however, eventually turned the pendulum in the direction of development.

Ten years ago, Russian billionaire Alisher Usmonov was given the right to develop Udoka and paid $ 500 million for his copper deposits. The Baikal mining company will later be established as Udokan copper to develop the site, which is expected to be operational next year. Conflicts could be significant for the region as well as for the wider copper market. Built in the 2020s, the Udokan project is expected to put ESG guidelines into operation in areas where older mines have never worked.

The investor is not the only one who exploits high copper prices and demand. Average mining in Chile, the world’s largest copper producer, has fallen by 30% over the past 15 years – but government-owned Kodelco is finally sinking into deposits after decades of investment.

Chilean President Sebastian Pira recently launched the Rajo Inca expansion of Kodelco Salvador’s copper operations. The $ 1.4 billion expansion will convert the underground mine into an open pit and increase production by 50%. Copper products are expected to exceed 40% of existing works and the project will extend its lifespan until 2070.

Moreover, the expansion of Rego Inca is just one pillar of Codelco’s plans to revitalize Chile’s copper mines: the state copper company plans to invest approximately $ 35 billion in structural investments over the next decade.

With this new investment, the supply of copper can be short-lived. Today’s high copper prices could cost the mine of tomorrow’s renewable revolution.

By Robert Rapier

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