Metals and Mining - Copper

Metals and Mining
Written By Tsedensodnom (Terry) Uranbold

SECTION 1: COPPER OVERVIEW

BUSINESS SENSE ABSTRACT

Witnessing robust growth driven by the ongoing energy transition, the global copper market boasts a revenue of USD 291.1 billion as of 2021. With versatile applicability across electronics, manufacturing, and infrastructure, copper has the highest electrical conductivity of all non-precious metals, making it one of the most essential metals in our current world. This massive industry is projected to grow at a CAGR of 4.9% from 2022 to 2030. Leading the world in copper production is Chile with 5.6 million tons (28% of global total mined production) in 2021, while the Asia-Pacific region dominates around 67% of the global copper market.

SIGNIFICANCE

According to Acumen Research and Consulting, the global copper market has been segmented into key application areas, including building & construction, transportation, industrial machinery & equipment, electrical & electronics, and consumer & general products. In addition, copper price is a leading indicator of the global economy’s future health, earning it a nickname ‘Dr. Copper’. The pervasive influence of copper in these diverse sectors makes it a critical industry for professionals to understand, given its dynamic complexity and associated challenges.

Copper price is a leading indicator of the global economy’s future health, earning it a nickname ‘Dr. Copper’.

CASE STUDY TOPICS

Common topics for case studies in this sector include market analysis and demand forecasting, optimizing operational efficiency, environmental and social responsibility, as well as risk assessment and mitigation.

KEY TRENDS & EVENTS

  1. Commodity price volatility: Recent trends indicate a surge in copper prices due to factors such as infrastructure plans and renewable energy demands, while supply-side challenges and environmental concerns may pose risks to production. Despite the prospect of rising demand and finite supply, the cyclical nature of copper prices suggests that investment opportunities will persist in the market.

  2. Policy changes:

    • In January 2020, the Chinese government reclassified high-quality copper and brass scrap as renewable materials, allowing their free import into China. Consequently, China's market share of US copper scrap exports surged to 31.50% in 2022, while Malaysia's share declined due to a 0% impurity scrap import policy implemented in the same year.

    • The Inflation Reduction Act (2022) and supply constraint: The Inflation Reduction Act (2022) in the U.S. boosts demand for critical metals like copper as automakers must source more EV battery components domestically or from a free-trade country, such as Australia and Canada. However, predicted copper supply shortages call for increased recycling efforts and innovative recovery methods from lower-grade sources.

  3. Environmental and social concerns: Copper mining expansion for clean energy raises environmental risks, threatening water access and air quality. Encouraging recycling and responsible mining practices can help, but communities face challenges in holding mining companies accountable for their impact.

  4. Large mergers and acquisitions: In the largest deal of 2023, BHP Group acquired copper-focused OZ Minerals for $5.94 billion, while, in 2022, Rio Tinto International Holdings completed its acquisition of the remaining 49.2% interest in Turquoise Hill Resources for $3.25 billion, gaining significant copper reserves and resources in both deals. The BHP-OZ Minerals acquisition includes several operating copper mines in Australia and Brazil with over 11 million metric tons of copper, while Rio Tinto's deal brings 15.7 million metric tons of copper, including the expansion-stage Oyu Tolgoi mine in Mongolia, expected to become the world's fourth-largest copper mine upon full ramp-up.

  5. Innovations in EV: New electric vehicles, including those from Tesla, are being designed with engineering changes that reduce the need for copper, which could limit the growth in copper demand despite the strong rise in electric vehicle sales. Innovations in EVs, such as using more compact batteries, thinner copper foil, and higher voltage systems, are expected to lower the copper content in each vehicle, challenging the previous bullish projections for copper demand from the EV industry.

INFLUENCES AND HEADWINDS

  1. US Dollar: As a globally traded commodity, copper is priced in US dollars. A decrease in the US dollar's value relative to the buyer's currency reduces the buyer's expenditure in their own currency to purchase copper, resulting in heightened demand and an increase in copper prices. Conversely, a stronger US dollar has the opposite effect on copper prices.

  2. Copper as collateral—China: As the world's largest consumer of copper, China holds considerable sway over copper prices. An estimated one-third of copper imported into China is used in financing arrangements as collateral. In the event of stricter financial conditions, there is a potential risk of copper being sold off, resulting in a decline in its collateral value.

  3. Copper mine supply and refining activities: Unforeseen events like geopolitical instability and natural disasters can disrupt copper mine supply unexpectedly. Moreover, an abundance of copper ore often leads to higher treatment and refining charges, potentially offsetting lower copper prices resulting from increased ore supply.

  4. Oil prices: Rising oil prices elevate the energy costs associated with ore extraction and processing, consequently driving an increase in copper prices.

  5. Economic activity: Speculations of economic recessions, economic slowdowns, particularly in China, and Fed rate hikes can exert downward pressure on copper prices. These factors may lead to reduced demand for copper in industrial activities, affecting its market value negatively.

CASE STUDY

The Chilean Copper Strike, also known as "El Paro Minero" (The Miners' Strike), was a significant labor dispute that occurred in Chile's copper mining industry in 2017. The strike had a notable impact on the global copper market and raised concerns about the stability of copper supply from one of the world's largest copper-producing countries.

Oyu Tolgoi, a copper and gold mine, is jointly owned by the Mongolian government and Turquoise Hill Resources Ltd., a subsidiary majority-owned by Rio Tinto. Tensions have arisen over resource nationalism, contract renegotiations, tax disputes, and environmental concerns. The conflict has broader implications for political stability in Mongolia and highlights the challenges faced by foreign mining companies operating in countries with significant natural resources. Balancing the interests of all stakeholders is crucial to managing political risks and fostering a stable operating environment for mining operations.

SECTION 2: COPPER INDUSTRY FINANCIALS & METRICS

REVENUE DRIVERS

For governments:

  1. Taxes and Royalties: Governments in copper-producing countries may impose taxes, royalties, or other fees on mining companies, contributing to revenue generation for the government.

For mining companies and related industries

  1. Mining companies: Copper mining companies are primary revenue generators in the industry. They extract copper ore from mines and sell it to downstream players. (see upstream vs. downstream – hyperlink to information source)

  2. Smelters and Refiners: After the ore is extracted, it needs to be processed and refined to obtain high-purity copper. Smelters and refiners play a crucial role in this process and generate revenue through treatment and refining charges.

  3. Manufacturers and Industrial Users: Industries like construction, electronics, transportation, and renewable energy heavily rely on copper for their products and processes. Manufacturers and industrial users purchase copper to incorporate into their goods, generating revenue for the sellers.

  4. Copper Consumers: End-users such as electrical utilities, automotive companies, and construction firms directly consume copper for their operations, contributing to revenue generation in the industry.

For traders and others:

  1. Copper Traders and Merchants: Traders and merchants facilitate the buying and selling of copper on behalf of mining companies, smelters, or consumers. They generate revenue through price differences and commissions.

  2. Investors and Speculators: Copper is actively traded in the commodities market, and investors and speculators participate to gain from price fluctuations. They may generate revenue through trading profits or hedging strategies.

  3. Commodity Exchanges: Copper is traded on commodity exchanges worldwide, and these exchanges earn revenue through transaction fees and other services related to copper trading.

COST DRIVERS (for mining companies to extract / price influences)

  1. Energy Costs: Energy costs play a significant role in the copper production process, including mining, crushing, grinding, and smelting. As copper mining and processing are energy-intensive operations, fluctuations in energy prices can impact production costs.

  2. Labor Costs: Labor expenses, including wages, benefits, and workforce-related expenditures, form a substantial portion of the overall cost structure in copper mining and processing activities.

  3. Ore Grades: Lower ore grades require more extensive mining and processing efforts to extract the same amount of copper, leading to increased costs. As ore grades decline over time, miners may need to invest in new technologies or explore deeper deposits, which can be costlier.

  4. Transportation and Logistics: The cost of transporting copper ore from mines to smelters and refineries and then delivering the final copper product to consumers affects the overall cost structure. Transportation costs can vary depending on the distance, infrastructure, and mode of transportation used.

  5. Regulatory and Compliance Costs: Compliance with environmental regulations, safety standards, and other legal requirements can add to the operational costs of copper mining and processing companies.

KEY TERMINOLOGIES & METRICS (in alphabetical order)

  1. Cathode: The high-purity copper sheet produced after the refining process, typically used for various industrial applications.

  2. Comex: The Commodity Exchange, a division of the New York Mercantile Exchange (NYMEX) where copper futures are traded.

  3. Contango and Backwardation: Terms used to describe the relationship between spot prices and futures prices of copper. Contango refers to a situation where futures prices are higher than the current spot price, while backwardation refers to the opposite scenario.

  4. Copper Belt: Refers to the region where significant copper mining activities take place, such as the Andes in South America.

  5. Copper Demand Drivers: Factors that influence copper consumption, including economic growth, infrastructure development, technological advancements, and renewable energy initiatives.

  6. Copper Scrap: Recycled copper materials from discarded products or manufacturing waste.

  7. Grade A Copper: The highest quality copper with a purity of 99.99%, meeting specific industry standards.

  8. LME Copper Warehousing: Refers to the practice of storing copper in approved warehouses registered with the London Metal Exchange.

  9. LME Week: An annual event organized by the London Metal Exchange, where industry participants discuss market trends, outlooks, and conduct negotiations.

  10. LME: Abbreviation for the London Metal Exchange, a major global platform for trading non-ferrous metals, including copper.

  11. SX-EW: Short for Solvent Extraction-Electrowinning, a copper extraction method used for processing low-grade ores.

  12. TC/RC: Treatment and Refining Charges, used to determine the fees paid to smelters for processing copper concentrates.

SECTION 3: COPPER INDUSTRY P&L REVIEW

Disclaimer: The contents of the following report are provided solely for reference purposes and should not be construed as providing any form of advice or recommendation. This report is not intended to substitute or replace any official documentation. For comprehensive and authoritative information, it is recommended that you consult the official reports issued by the respective companies.

RIO TINTO 2022 AND 2021 COPPER SEGMENT P&L REVIEW

Other overall company information:

  • Consolidated sales revenues: $55.6 billion (2021: $63.5 billion)

        

  • Net cash generated from operating activities: $16.1 billion (2021: $25.3 billion)

  • Profit after tax attributable to owners of Rio Tinto (net earnings): $12.4 billion (2021: $21.1 billion)

        

  • Underlying EBITDA: $26.3 billion (2021: $37.7)

BHP 2022 AND 2021 COPPER SEGMENT P&L REVIEW

Other overall company information:

  • Consolidated sales revenue: $65 billion ($56.9 billion)

  • Net cash generated from operating activities: $32.1 billion ($27.2 billion)

  • Profit after tax attributable to BHP shareholders: $30.9 billion (2021: $11.3 billion)

  • Underlying EBITDA: $40.6 billion ($37.3 billion)

SECTION 4: VIDEO REFERENCES

Tsedensodnom (Terry) Uranbold

I am a first-year Master of Environmental Management (Business & Energy) candidate at Duke University's Nicholas School of the Environment. Born and raised in Mongolia—a developing nation with a strong reliance on natural resources and minerals for development—I have always been drawn to sustainable and equitable development driven by mining. I have gained relevant professional experiences at Rio Tinto and the Government of Mongolia, working at Oyu Tolgoi, one of the largest copper mines in the world. I am passionate about leveraging data analysis tools, such as STATA and Python, to create data-driven solutions to energy issues. Additionally, I am dedicated to connecting emerging markets with investment opportunities in clean energy and mine rehabilitation.

https://www.linkedin.com/in/tsedensodnomuranbold/
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