Alan Kohler: The importance of copper in a net-zero world

The copper price has surged 23 per cent since early February, and last week BHP launched a $60 billion takeover of copper producer (among other things) Anglo American.

The reason for both of these things is easy to find.

Copper has the highest electrical conductivity of any non-precious metal, and while silver is better, it is 85 times the price ($US27.24 per ounce v $US4.54 per pound).

So copper it is, and with the world electrifying to remove oil and gas, it means a lot more highly conductive electrical wires will be needed.

It is, in short, one of the most obvious reasons for investing in a commodity in history, although as we learnt from lithium, there’s no such thing as a guaranteed one-way bet. (The lithium price crashed 80 per cent in 2023 despite being the most obvious commodity bull case ever known, and a one-way bet).

The other reason copper is rising this year is that it is said to have a PhD in economics (it’s often called Dr Copper) because it tends to follow the manufacturing cycle, which has turned up.

But the main case for copper is its electrical conductivity in a world that must electrify – there is no choice but to use more of it. 

And it’s not just the energy transition with electric vehicles and more wiring to replace oil and gas – artificial intelligence is going to increase the demand for electricity a lot more than is needed simply to replace fossil fuels.

John Caruso, senior market strategist at RJO Futures, said recently that copper had reached an “Isaac Newton moment” where “the apple has fallen onto the heads of global commodity traders and end users, and they’re just now waking up to the reality of enhanced future demand.”

And as with many things, it’s all about China. Data from the International Copper Study Group (ICSG) estimate that refined copper usage increased 6 per cent in January, entirely because of a 12 per cent lift in demand in China, with a 29 per cent increase in imports. The ICSG said usage in the rest of the world declined by about 0.1 per cent.

So to say the least, China is important to the copper market, because of its decision to use green manufacturing – EVs and renewable energy – to replace property as the main driver of economic growth.

Thanks to Chinese demand and a lack of new mines, there was a worldwide copper deficit of 85,000 tonnes in 2023 according to the ICSG.

The immediate question for the copper market is whether the world can absorb all this Chinese production of cars and solar panels. David Oxley of Capital Economics says China will produce 500 gigawatts of “excess” solar panels this year, almost four times the new solar capacity installed in the rest of the world in 2023.

China’s domestic power sector is now the single biggest driver of copper demand. Electricity and heat investment was up a staggering 36.7 per cent year over year in the first quarter of 2024, the fastest rate of growth since 2005 according to figures from CEIC.

If that were to slow for any reason – fiscal constraints or connection issues for the vast number of new solar panels coming online, for example – China’s copper demand would take a major hit.

Nevertheless Australia’s biggest mining company, BHP, is making a long-term bet on copper demand. It’s already building a copper province in South Australia around Olympic Dam and the nearby Prominent Hill mine it bought with the takeover of OZ Minerals a year ago.

Now it wants to add Anglo American’s four copper mines, all in South America, which produced 198,000 tonnes of copper in the first quarter of this year, and contributed about 43 per cent of Anglo’s revenue. 

BHP’s and Anglo’s combined copper production will be roughly the same percentage of global copper sales as its share of the global iron ore market – 10 per cent – although its iron ore market power is enhanced by having a sort of oligopoly with the other Australian miners, so its copper market share won’t have the same clout.

But it would be a decent share of global copper in what should be a long boom due to the energy transition and artificial intelligence. It certainly looks a better bet than the Billiton acquisition was.

But will the bid succeed? The Financial Times’ Lex column says the price will have to be higher: “Combining the shares in Amplats and Kumba with a slug of BHP stock means a price about 32 per cent above Anglo’s average share price over three months. That does not look enough.

“At £25.08 a share, the deal is pitched only 19 per cent above where Anglo was trading earlier this week. That headline price and premium are already down slightly, thanks to Amplats and Kumba shares falling on Thursday.

“The miner will need to dig deeper to get this project over the line.”

Apart from the price, BHP will also have to persuade the South African government – competition law there has a public interest clause that could be difficult to get around.

Meanwhile, the chairman of Rio Tinto was “tightlipped” this when asked if Rio was planning a rival bid for Anglo American. In any case, the company is ramping up production at its own copper mine in Mongolia.

All things considered this saga has only just begun, but whatever happens it’s a good pointer to the growing importance of copper in a net-zero world.

Alan Kohler writes weekly for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor

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