Will the copper deficit derail the renewable energy revolution?
The supply chain disruptions that marked the first months of the coronavirus pandemic have cast a long shadow. Once economies around the world began to reopen in the second half of 2020, many shortages emerged in various industries.
Commodity prices have skyrocketed. Crude oil, lumber, and important metals like copper and aluminum have all seen prices soar to multi-year highs, causing negative effects across the wide range of sectors that depend on these commodities.
Soaring copper prices are eroding renewable energy margins
The clean energy sector, in particular, has seen its margins contract. As renewable energy technologies become more competitive when oil prices are high, the sector is also heavily dependent on base metals, especially copper, which hit record prices earlier this year.
Copper, one of the best conductors of electricity, is widely used in the production of electric vehicles, wind turbines and solar panels. Offshore wind farms, due to their extensive wiring, are particularly copper-hungry, requiring 9.6 metric tons of copper per megawatt (MW) of power capacity. Onshore wind farms and solar photovoltaic (PV) are also very greedy in copper, requiring respectively 4.3 tons and 5 tons of copper per MW.
The copper market will come under increased pressure as each of these renewable energy technologies is expected to grow rapidly over the next three decades, with ripple effects for investors in the renewable energy sector. Indeed, soaring copper prices are already eroding margins on many clean energy projects.
Norwegian oil and gas company Equinor (formerly Statoil) – now a major developer of wind farms – has started lowering investor expectations on its renewable energy projects. The company recently lowered its forecast for returns from 6-10% in 2020 to 4-8% this year. Denmark’s Ørsted A / S (formerly DONG Energy), the world’s largest developer of offshore wind farms, said return on capital employed fell from 11% in the first quarter of 2020 to 7.5% a year later. Danish competitor Vestas Wind Systems saw yields drop from 17.4% to 12.2% over the same period.
If this trend continues unchecked, many renewable energy projects could become financially unfeasible for all companies except the largest with the richest pockets.
The cure for high prices
Will the challenges of copper supply derail the early energy transition? There are certainly concerns about an impending copper shortage. Citigroup
There is some truth, however, in the old adage that “the cure for high prices is high prices.” Commodity markets are cyclical precisely because high prices stimulate investment. Finally, the new investments lead to an increase in the production of the product, which leads to a fall in the price of the product. If prices fall too much, investment dries up and the excess supply ends up turning into a deficit, which ends the cycle.
When oil prices soared to over $ 100 a barrel, projects that were once economically unfeasible suddenly became more attractive and investment poured into the oil industry. The shale oil boom followed and a number of heavy oil projects were implemented.
Likewise, the copper deficit that drove prices up has triggered short-term pain, but there is a silver lining: high copper prices are causing a wave of investment in projects that would have been financially unfeasible. .
A fresh supply from Udokan and Codelco could be a game-changer
Take the Udokan deposit, for example, which is Russia’s largest untapped copper deposit and the third in the world. Despite the fact that Udokan holds reserves estimated at 26.7 million tonnes of copper, the site has remained underdeveloped since its discovery in 1949 due to the technological and logistical challenges of operating the remote site near the lake. Baikal.
For decades, the biggest obstacle to mining the Udokan deposit was simply that technical challenges drove mining costs to an uneconomic level. Whenever enthusiasm for the development of the project grew, economic risks dissuaded investors. High copper prices and projections of strong demand growth in the decades to come, however, eventually shifted the pendulum in the direction of development.
Russian billionaire Alisher Usmanov won the right to develop Udokan more than ten years ago, paying $ 500 million to license the large copper deposit. Usmanov formed the Baikal Mining Company, later renamed Udokan Copper, to develop the site, and the project is expected to become operational next year. The ramifications are likely to be substantial, both for the region as well as for the copper market at large. Being built in the 2020s, Project Udokan is expected to place ESG guidelines at the heart of its operations in a way that old mines never did.
Usmanov is not the only investor benefiting from high copper prices and demand. Average ore grades in Chile, the world’s largest copper producer, have fallen 30% in the past 15 years, but state-owned Codelco is finally pouring silver into its deposits after decades of underinvestment.
Chilean President Sebastián Piñera recently launched the Rajo Inca expansion of Codelco Salvador’s copper operations. The $ 1.4 billion expansion will shift mining from underground mining to surface mining and is expected to increase production by 50%. Copper grades are expected to be 40% higher than current operations, and the life of the project will be extended until 2070.
In addition, the expansion of Rajo Inca is only one of the pillars of Codelco’s plans to revitalize Chilean copper mining: the national copper company intends to make some 35 billion dollars in investments. structural over the next decade.
With this new investment increasing the supply of copper, the gloom could be short-lived. Today’s high copper prices may well finance the mines that will fuel tomorrow’s renewable revolution.